Reported income from continuing operations of $682 million,
or $4.40 per diluted share for 2007, compared to
$782 million, or $4.81 per diluted share, for 2006. The
most significant item contributing to the $100 million
decrease in income from continuing operations in 2007, when
compared to 2006, was an increase in the provision for loan
losses of $175 million. Net income was $686 million,
or $4.43 per diluted share for 2007, compared to
$893 million, or $5.49 per diluted share for 2006. Included
in net income in 2006 was a $108 million after-tax gain on
the sale of the Corporations Munder subsidiary



Returned 13.52 percent on average common shareholders
equity and 1.17 percent on average assets



Generated growth from December 31, 2006 to
December 31, 2007 of $3.3 billion in loans and
$1.3 billion in unused commitments to extend credit



Generated geographic market growth in average loans (excluding
Financial Services Division) of seven percent from 2006 to 2007,
including Texas (16 percent), Western (13 percent) and
Florida (11 percent), with the Midwest market down one
percent



Increased total revenue two percent, including four percent
growth in noninterest income. Excluding a $47 million
Financial Services Division-related lawsuit settlement and a
$12 million loss on the sale of the Mexican bank charter in
2006, total revenue growth was three percent and noninterest
income growth was eight percent



Contained the increase in noninterest expenses to
$17 million, or one percent, from 2006. 2007 included
incremental expenses related to new banking centers
($23 million), a charge related to the Corporations
membership in Visa, Inc. (Visa) ($13 million) and costs
associated with the previously announced headquarters move to
Dallas, Texas ($6 million). 2006 noninterest expense
included interest on tax liabilities of $38 million.
Interest on tax liabilities was not classified in noninterest
expenses in 2007, and instead classified in the provision
for income taxes. Full-time equivalent employees increased
less than one percent from 2006 to 2007, even with the addition
of 30 new banking centers during the period



Incurred net credit-related charge-offs of 31 basis points
as a percent of average total loans in 2007, compared to
15 basis points in 2006; nonperforming assets increased to
$423 million, reflecting challenges in the residential real
estate development industry in Michigan and California



Raised the quarterly cash dividend 8.5 percent, to $0.64
per share, an annual rate of $2.56 per share, for an annual
dividend payout ratio of 58 percent



Repurchased 10 million shares of outstanding common stock
in the open market for $580 million, which combined with
dividends, returned 142 percent of earnings to shareholders

Key
Corporate Initiatives



Relocated corporate headquarters to Dallas, Texas, where
Comerica already had a major presence, to position the
Corporation in a more central location with greater
accessibility to all markets. Comerica is now the largest bank
headquartered in Texas



Continued organic growth focused in high growth markets,
including opening 30 new banking centers in 2007; in 2008,
Comerica expects to open 32 new banking centers. Since the
banking center expansion program began in late 2004, new banking
centers have resulted in nearly $1.8 billion in new deposits



Continued to refine and develop the enterprise-wide risk
management and compliance programs, including improvement of
analytics, systems and reporting



Managed full-time equivalent staff growth to less than one
percent, even with approximately 140 full-time equivalent
employees added to support new banking center openings



Reduced automotive production exposure from loans, unused
commitments and standby letters of credit and financial
guarantees from $4.2 billion at December 31, 2006 to
$3.7 billion at December 31, 2007

20

OVERVIEW/EARNINGS
PERFORMANCE

Comerica Incorporated (the Corporation) is a financial holding
company headquartered in Dallas, Texas. The Corporations
major business segments are the Business Bank, the Retail Bank
and Wealth & Institutional Management. The core
businesses are tailored to each of the Corporations four
primary geographic markets: Midwest, Western, Texas and Florida.

The accounting and reporting policies of the Corporation and its
subsidiaries conform to U.S. generally accepted accounting
principles and prevailing practices within the banking industry.
The Corporations consolidated financial statements are
prepared based on the application of accounting policies, the
most significant of which are described on page 72 in
Note 1 to the consolidated financial statements. The most
critical of these significant accounting policies are discussed
in the Critical Accounting Policies section on
page 62 of this financial review.

As a financial institution, the Corporations principal
activity is lending to and accepting deposits from businesses
and individuals. The primary source of revenue is net interest
income, which is derived principally from the difference between
interest earned on loans and investment securities and interest
paid on deposits and other funding sources. The Corporation also
provides other products and services that meet the financial
needs of customers and which generate noninterest income, the
Corporations secondary source of revenue. Growth in loans,
deposits and noninterest income is affected by many factors,
including the economic growth in the markets the Corporation
serves, the financial requirements and health of customers and
successfully adding new customers
and/or
increasing the number of products used by current customers.
Success in providing products and services depends on the
financial needs of customers and the types of products desired.

The Corporation sold its stake in Munder Capital Management
(Munder) in 2006. This financial review and the consolidated
financial statements reflect Munder as a discontinued operation
in all periods presented. For detailed information concerning
the sale of Munder and the components of discontinued
operations, refer to Note 26 to the consolidated financial
statements on page 127.

The remaining discussion and analysis of the Corporations
results of operations is based on results from continuing
operations.

The Corporation generated growth of $3.3 billion in loans
and $1.3 billion in unused commitments to extend credit
from December 31, 2006 to December 31, 2007. Excluding
Financial Services Division, nearly all business lines showed
average loan growth in 2007, compared to 2006, including
Specialty Businesses, which includes Entertainment, Energy,
Leasing, and Technology and Life Sciences (17 percent),
Global Corporate Banking (12 percent), Private Banking
(11 percent), National Dealer Services (5 percent),
Commercial Real Estate (5 percent), Small Business
(5 percent) and Middle Market (5 percent). Excluding
Financial Services Division, average loans grew in the Texas
(16 percent), Western (13 percent) and Florida
(11 percent) geographic markets in 2007, compared to 2006,
and declined one percent in the Midwest market. Average loans
decreased 44 percent in 2007 in the Financial Services
Division, where customers deposit large balances (primarily
noninterest-bearing) and the Corporation pays certain customer
services expenses (included in noninterest expenses on the
consolidated statements of income)
and/or makes
low-rate loans (included in net interest income on the
consolidated statements of income) to such customers. Average
deposits excluding Financial Services Division increased
$1.9 billion, or five percent from 2006. The increase in
average deposits excluding Financial Services Division when
compared to 2006, resulted primarily from an increase in
customer and institutional certificates of deposit. Average
Financial Services Division deposits decreased
$2.0 billion, or 34 percent, in 2007, compared to
2006. The decrease in average Financial Services Division
deposits in 2007, when compared to 2006, resulted from a
$1.5 billion decrease in average noninterest-bearing
deposits and a $508 million decrease in average
interest-bearing deposits. Noninterest-bearing deposits in the
Corporations Financial Services Division include title and
escrow deposits, which benefit from home mortgage financing and
refinancing activity. Financial Services Division deposit levels
may change with the direction of mortgage activity changes, the
desirability of such deposits and competition for deposits. Net
interest income increased one percent in 2007, compared to 2006,
primarily due to loan growth.

The Corporations credit staff closely monitors the
financial health of lending customers in order to assess ability
to repay and to adequately provide for expected losses. Loan
quality was impacted by challenges in the residential real
estate development industry in Michigan and California and a
leveling off of overall credit quality improvement trends in the
Texas market and remaining businesses in the Western market.
Credit quality trends resulted in an increase in net
credit-related charge-offs and nonperforming assets in 2007,
compared to 2006. The tools developed in the past several years
for evaluating the adequacy of the allowance for loan losses,
and the resulting information gained from these processes,
continue to help the Corporation monitor and manage credit risk.

Noninterest expenses increased one percent in 2007, compared to
2006, primarily due to increases in net occupancy and equipment
expense ($18 million), regular salaries ($16 million)
and a charge related to the Corporations membership in
Visa ($13 million), partially offset by a decrease
resulting from the prospective change in the classification of
interest on tax liabilities to provision for income
taxes on the consolidated statements of income effective
January 1, 2007. Noninterest expenses included
$38 million of interest on tax liabilities in 2006. The
$18 million increase in net occupancy and equipment expense
in 2007 included $9 million from the addition of 30 new
banking centers. Full-time equivalent employees increased by
less than one percent (approximately 80 employees) from
year-end 2006 to year-end 2007, even with approximately
140 full-time equivalent employees added to support new
banking center openings.

A majority of the Corporations revenues are generated by
the Business Bank business segment, making the Corporation
highly sensitive to changes in the business environment in its
primary geographic markets. To facilitate better balance among
business segments and geographic markets, the Corporation opened
30 new banking centers in 2007 in markets with favorable
demographics and plans to continue banking center expansion in
these markets. This is expected to provide opportunity for
growth across all business segments, especially in the Retail
Bank and Wealth & Institutional Management segments,
as the Corporation penetrates existing relationships through
cross-selling and develops new relationships.

For 2008, management expects the following, compared to 2007
from continuing operations (assumes the economy experiences slow
growth in 2007 rather than a recession):



Mid to high single-digit average loan growth, excluding
Financial Services Division loans, with flat growth in the
Midwest market, high single-digit growth in the Western market
and low double-digit growth in the Texas market



Average earning asset growth in excess of average loan growth



Average Financial Services Division noninterest-bearing deposits
of $1.2 to $1.4 billion. Financial Services Division loans
will fluctuate in tandem with the level of noninterest-bearing
deposits



Based on the federal funds rate declining to 2.00 percent by
mid-year 2008, average full year net interest margin between
3.10 and 3.15 percent, including the effects of higher levels of
securities, lower value of noninterest-bearing deposits, average
loan growth exceeding average deposit growth and the 2008
FAS 91 impact discussed below



Average net credit-related charge-offs between 45 and
50 basis points of average loans, with charge-offs in the
first half higher than in the second half of 2008. The provision
for credit losses is expected to exceed net charge-offs

Statement of Financial Accounting Standards No. 91
(FAS 91) - Accounting for Loan Origination Fees and Costs.
Beginning in 2008, a change in the application of FAS 91
will result in deferral and amortization (over the loan life) to
net interest income of more fees and costs. Based on assumptions
for loan growth, loan fees and average loan life, the estimated
impact on 2008, compared to 2007, will be to lower the net
interest margin by about 3-4 basis points (approximately
$20 million), lower noninterest expenses by about
3-4 percent (approximately $60 million) and increase
earnings per share by about four cents per quarter

The gain or loss attributable to
the effective portion of cash flow hedges of loans is shown in
Business loan swap expense. The gain or loss
attributable to the effective portion of fair value hedges of
institutional certificates of deposits and medium- and long-term
debt, which totaled a net gain of $12 million in 2007, is
included in the related interest expense line items.

(5)

Nonaccrual loans are included in
average balances reported and are used to calculate rates.

(6)

Average rate based on average
historical cost.

(7)

Institutional certificates of
deposit and medium- and long-term debt average balances have
been adjusted to reflect the gain or loss attributable to the
risk hedged by risk management swaps that qualify as a fair
value hedge.

(8)

Includes substantially all deposits
by foreign domiciled depositors; deposits are primarily in
excess of $100,000.

(9)

The FTE adjustment is computed
using a federal income tax rate of 35%.

23

TABLE 3:
RATE-VOLUME ANALYSIS-Fully Taxable Equivalent (FTE)

2007/2006

2006/2005

Increase

Increase

Net

Increase

Increase

Net

(Decrease)

(Decrease)

Increase

(Decrease)

(Decrease)

Increase

Due to Rate

Due to Volume*

(Decrease)

Due to Rate

Due to Volume*

(Decrease)

(in millions)

Interest income (FTE):

Loans:

Commercial loans

$

104

$

57

$

161

$

306

$

190

$

496

Real estate construction loans

(16

)

54

38

44

61

105

Commercial mortgage loans

(1

)

35

34

89

52

141

Residential mortgage loans

1

15

16

4

11

15

Consumer loans

(3

)

(12

)

(15

)

34

(12

)

22

Lease financing

(12

)



(12

)

2

1

3

International loans

1

5

6

22

(21

)

1

Business loan swap expense

57



57

(122

)



(122

)

Total loans

131

154

285

379

282

661

Investment securities available-for-sale

11

21

32

20

6

26

Federal funds and securities purchased under agreements to resell

1

(6

)

(5

)

8

(6

)

2

Other short-term investments

(3

)

(1

)

(4

)

1

5

6

Total interest income (FTE)

140

168

308

408

287

695

Interest expense:

Interest-bearing deposits:

Money market and NOW accounts

30

(13

)

17

161

(55

)

106

Savings deposits

2



2

5

(1

)

4

Certificates of deposit

29

52

81

69

44

113

Institutional certificates of deposit

7

58

65

8

208

216

Foreign office time deposits



(3

)

(3

)

6

12

18

Total interest-bearing deposits

68

94

162

249

208

457

Short-term borrowings

5

(30

)

(25

)

19

59

78

Medium- and long-term debt

(4

)

155

151

66

68

134

Total interest expense

69

219

288

334

335

669

Net interest income (FTE)

$

71

$

(51

)

$

20

$

74

$

(48

)

$

26

* Rate/volume variances are allocated to variances due to
volume.

Net
Interest Income

Net interest income is the difference between interest and
yield-related fees earned on assets and interest paid on
liabilities. Adjustments are made to the yields on tax-exempt
assets in order to present tax-exempt income and fully taxable
income on a comparable basis. Gains and losses related to the
effective portion of risk management interest rate swaps that
qualify as hedges are included with the interest income or
expense of the hedged item when classified in net interest
income. Net interest income on a fully taxable equivalent (FTE)
basis comprised 69 percent of total revenues in 2007,
compared to 70 percent in 2006 and 71 percent in 2005.
Table 2 on page 23 of

24

this financial review provides an analysis of net interest
income for the years ended December 31, 2007, 2006 and
2005. The rate-volume analysis in Table 3 above details the
components of the change in net interest income on a FTE basis
for 2007 compared to 2006 and 2006 compared to 2005.

Net interest income (FTE) was $2.0 billion in 2007, an
increase of $20 million, or one percent, from 2006. The net
interest margin (FTE), which is net interest income (FTE)
expressed as a percentage of average earning assets, decreased
to 3.66 percent in 2007, from 3.79 percent in 2006.
The increase in net interest income in 2007 was due to loan
growth, which was partially offset by a decline in
noninterest-bearing deposits (primarily in the Financial
Services Division) and competitive environments for both loan
and deposit pricing. The decrease in net interest margin (FTE)
was due to loan growth, a competitive loan and deposit pricing
environment and changes in the funding mix, including a
continued shift in funding sources toward higher-cost funds.
Partially offsetting these decreases were maturities of interest
rate swaps that carried negative spreads, which provided a
10 basis point improvement to the net interest margin in
2007, compared to 2006. Average earning assets increased
$2.4 billion, or five percent, to $54.7 billion in
2007, compared to 2006, primarily as a result of a
$2.1 billion increase in average loans and a
$455 million increase in average investment securities
available-for-sale. Average Financial Services Division loans
(primarily low-rate) decreased $1.0 billion, and average
Financial Services Division noninterest-bearing deposits
decreased $1.5 billion in 2007, compared to 2006.

The Corporation expects, on average, net interest margin in 2008
to be between 3.10 and 3.15 percent for the full year, based on
the federal funds rate declining to 2.00 percent by mid-year
2008 and including the effects of higher levels of securities,
lower value of noninterest-bearing deposits, average loan growth
exceeding average deposit growth and the 2008 FAS 91 impact
discussed in the 2008 guidance provided on page 22 of this
financial review.

Net interest income and net interest margin are impacted by the
operations of the Corporations Financial Services
Division. Financial Services Division customers deposit large
balances (primarily noninterest-bearing) and the Corporation
pays certain customer services expenses (included in
noninterest expenses on the consolidated statements
of income)
and/or makes
low-rate loans (included in net interest income on
the consolidated statements of income) to such customers.
Footnote (1) to Table 2 on page 23 of this financial
review displays average Financial Services Division loans and
deposits, with related interest income/expense and average
rates. As shown in Footnote (2) to Table 2 on page 23
of this financial review, the impact of Financial Services
Division loans (primarily low-rate) on net interest margin
(assuming the loans were funded by Financial Services Division
noninterest-bearing deposits) was a decrease of 8 basis
points in 2007, compared to a decrease of 16 basis points
in 2006.

The Corporation implements various asset and liability
management tactics to manage net interest income exposure to
interest rate risk. Refer to the Interest Rate Risk
section on page 54 of this financial review for additional
information regarding the Corporations asset and liability
management policies.

In 2006, net interest income (FTE) was $2.0 billion, an
increase of $26 million, or one percent, from 2005. The net
interest margin (FTE) decreased to 3.79 percent in 2006,
from 4.06 percent in 2005. The increase in net interest
income in 2006 was due to strong loan growth, which was nearly
offset by a decline in noninterest-bearing deposits (primarily
in the Financial Services Division), competitive environments
for both loan and deposit pricing and the impact of warrant
accounting change discussed in Note 1 to the consolidated
financial statements on page 72, which resulted in a
$20 million increase in net interest income in 2005. A
greater contribution from noninterest-bearing deposits in a
higher rate environment also benefited net interest income in
2006. The decrease in net interest margin (FTE) was due to the
2005 warrant accounting change, which increased the
2005 net interest margin by four basis points, the changes
in average Financial Services Division loans and
noninterest-bearing deposits discussed below, competitive loan
and deposit pricing, a change in the interest-bearing deposit
mix toward higher-cost deposits and the margin impact of loan
growth funded with non-core deposits and purchased funds.
Average earning assets increased $4.1 billion, or eight
percent, to $52.3 billion in 2006, compared to 2005,
primarily as a result of a $3.9 billion increase in average
loans and a $131 million increase in average investment
securities available-for-sale. Average Financial Services
Division loans (primarily low-rate) increased $470 million,
and average Financial Services Division noninterest-bearing
deposits decreased $1.5 billion in 2006, compared to 2005.

25

Provision
for Credit Losses

The provision for credit losses includes both the provision for
loan losses and the provision for credit losses on
lending-related commitments. The provision for loan losses
reflects managements evaluation of the adequacy of the
allowance for loan losses. The allowance for loan losses
represents managements assessment of probable losses
inherent in the Corporations loan portfolio. The provision
for credit losses on lending-related commitments, a component of
noninterest expenses on the consolidated statements
of income, reflects managements assessment of the adequacy
of the allowance for credit losses on lending-related
commitments. The allowance for credit losses on lending-related
commitments, which is included in accrued expenses and
other liabilities on the consolidated balance sheets,
covers probable credit-related losses inherent in credit-related
commitments, including letters of credit and financial
guarantees. The Corporation performs an in-depth quarterly
credit quality review to determine the adequacy of both
allowances. For a further discussion of both the allowance for
loan losses and the allowance for credit losses on
lending-related commitments, refer to the Credit
Risk section of this financial review on page 44, and
the Critical Accounting Policies section on
page 62 of this financial review.

The provision for loan losses was $212 million in 2007,
compared to $37 million in 2006 and a negative provision of
$47 million in 2005. The $175 million increase in the
provision for loan losses in 2007, compared to 2006, resulted
primarily from challenges in the residential real estate
development industry in Michigan and California and a leveling
off of overall credit quality improvement trends in the Texas
market and the remaining businesses of the Western market. These
credit trends reflect economic conditions in the
Corporations three largest geographic markets. While the
economic conditions in Michigan deteriorated over the last year,
the economic conditions in Texas continued to experience growth
at a rate somewhat faster than the national economy, while those
in California, other than real estate, grew at a rate equal to
the nation as a whole. The average 2007 Michigan Business
Activity index compiled by the Corporation was slightly lower
than the average for 2006. However, intense restructuring
efforts in the Michigan-based automotive sector created a
significant drag on the state economy that spilled over to other
sectors, with the residential real estate development industry
one of the most affected. Forward-looking indicators suggest
that current economic conditions in Michigan will deteriorate at
about the same pace as in 2007 and that growth in California and
Texas will be slower than it was last year. The increase in the
provision for loan losses in 2006, when compared to 2005, was
primarily the result of loan growth, challenges in the
automotive industry and the Michigan residential real estate
development industry, and a leveling off of credit quality
improvement trends.

The provision for credit losses on lending-related commitments
was a negative provision of $1 million in 2007, compared to
charges of $5 million and $18 million in 2006 and
2005, respectively. The $6 million decrease in the
provision for credit losses on lending-related commitments in
2007 was primarily the result of a decrease in specific reserves
related to unused commitments extended to two large customers in
the automotive industry. These reserves declined due to sales of
commitments and improved market values for the remaining
commitments. The decrease in 2006 was primarily due to reduced
reserve needs resulting from improved market values for unfunded
commitments to certain customers in the automotive industry. An
analysis of the changes in the allowance for credit losses on
lending-related commitments is presented on page 45 of this
financial review.

Net loan charge-offs in 2007 were $149 million, or
0.30 percent of average total loans, compared to
$60 million, or 0.13 percent, in 2006 and
$110 million, or 0.25 percent, in 2005. The
$89 million increase from 2006 resulted primarily from
increases in Midwest residential real estate development
($43 million), Midwest middle market lending
($34 million) and Western residential real estate
development ($16 million). Total net credit-related
charge-offs, which includes net charge-offs on both loans and
lending-related commitments, were $153 million, or
0.31 percent of average total loans, in 2007, compared to
$72 million, or 0.15 percent, in 2006 and
$116 million, or 0.26 percent, in 2005. Of the
$81 million increase in net credit-related charge-offs in
2007, compared to 2006, net credit-related charge-offs in the
Business Bank business segment increased $80 million. By
geographic market, net credit-related charge-offs in the Midwest
and Western markets increased $62 million and
$27 million in 2007 compared to 2006. Net credit-related
charge-offs in 2006 were impacted by a decision to sell a
$74 million portfolio of loans related to manufactured
housing. These loans were transferred to held-for-sale in the
fourth quarter 2006, which required a charge-off of
$9 million to adjust the loans to estimated fair value. An
analysis of the changes in the allowance for loan losses,
including charge-offs and recoveries by loan category, is
presented in Table 8 on page 45 of this financial review.
An analysis of the changes in the allowance for credit losses on
lending-related commitments is presented on page 45 of this
financial review.

26

Management expects full-year 2008 average net credit-related
charge-offs between 45 and 50 basis points of average
loans, with charge-offs in the first half higher than in the
second half of 2008. The provision for credit losses is expected
to exceed net charge-offs.

Noninterest
Income

Years Ended December 31

2007

2006

2005

(in millions)

Service charges on deposit accounts

$

221

$

218

$

218

Fiduciary income

199

180

174

Commercial lending fees

75

65

63

Letter of credit fees

63

64

70

Foreign exchange income

40

38

37

Brokerage fees

43

40

36

Card fees

54

46

39

Bank-owned life insurance

36

40

38

Net income from principal investing and warrants

19

10

17

Net securities gains

7





Net gain (loss) on sales of businesses

3

(12

)

1

Income from lawsuit settlement



47



Other noninterest income

128

119

126

Total noninterest income

$

888

$

855

$

819

Noninterest income increased $33 million, or four percent,
to $888 million in 2007, compared to $855 million in
2006, and increased $36 million, or five percent, in 2006,
compared to $819 million in 2005. Excluding net securities
gains, net gain (loss) on sales of businesses and income from
lawsuit settlement, noninterest income increased seven percent
in 2007 and less than one percent in 2006. An analysis of
increases and decreases by individual line item is presented
below.

Service charges on deposit accounts increased $3 million,
or one percent, to $221 million in 2007, compared to
$218 million in both 2006 and 2005.

Fiduciary income increased $19 million, or 11 percent,
in 2007 and increased $6 million, or four percent, in 2006.
Personal and institutional trust fees are the two major
components of fiduciary income. These fees are based on services
provided and assets managed. Fluctuations in the market values
of the underlying assets managed, which include both equity and
fixed income securities, impact fiduciary income. The increase
in 2007 and 2006 was due to net new business and market
appreciation.

Commercial lending fees increased $10 million, or
16 percent, in 2007, compared to an increase of
$2 million, or two percent, in 2006. The increases in 2007
and 2006 were primarily due to higher commercial loan commitment
and participation fees.

Letter of credit fees decreased $1 million, or two percent,
in 2007, compared to a decrease of $6 million, or eight
percent, in 2006. The 2007 decrease in letter of credit fees was
principally due to competitive pricing pressures and lower
demand resulting from the recent challenges in the residential
real estate market. Of the 2006 decline, $3 million
reflected the impact, in 2005, of an adjustment of deferred fee
amortization to more closely align the amortization periods with
actual terms of the letters of credit.

Foreign exchange income increased $2 million, or five
percent, to $40 million in 2007, compared to
$38 million and $37 million in 2006 and 2005,
respectively. The increase in 2007 was primarily due to the
impact of exchange rate changes on the Canadian dollar
denominated net assets held at the Corporations Canadian
branch.

Brokerage fees of $43 million increased $3 million, or
nine percent, in 2007, compared to $40 million and
$36 million in 2006 and 2005, respectively. Brokerage fees
include commissions from retail broker transactions

27

and mutual fund sales and are subject to changes in the level of
market activity. The increase in 2007 was primarily due to
increased customer investments in money market mutual funds. The
increase in 2006 was primarily due to increased transaction
volumes as a result of improved market conditions.

Card fees, which consist primarily of interchange fees earned on
debit and commercial cards, increased $8 million, or
16 percent, to $54 million, compared to
$46 million in 2006, and increased $7 million, or
17 percent, compared to $39 million in 2005. Growth in
both 2007 and 2006 resulted primarily from an increase in
transaction volume caused by the continued shift to electronic
banking, new customer accounts and new products.

Bank-owned life insurance income decreased $4 million, to
$36 million in 2007, compared to an increase of
$2 million, to $40 million in 2006. The decrease in
2007 resulted primarily from a decrease in death benefits
received and decreased earnings, as a result of interest rate
changes.

Net income from principal investing and warrants increased
$9 million to $19 million in 2007, compared to
$10 million in 2006 and $17 million in 2005. The
$9 million increase in 2007 included a $5 million
increase in warrant income and $4 million of additional
income generated from the Corporations indirect private
equity investments.

Net securities gains were $7 million in 2007, none of which
were individually significant, and were minimal in both 2006 and
2005.

The net gain (loss) on sales of businesses in 2007 included a
net gain of $1 million on the sale of an insurance
subsidiary and a $2 million adjustment to reduce the loss
on the 2006 sale of the Corporations Mexican bank charter,
while 2006 included a net loss of $12 million on the sale
of the Mexican bank charter.

The income from lawsuit settlement of $47 million in 2006
resulted from a payment received to settle a Financial Services
Division-related lawsuit in the fourth quarter 2006.

Other noninterest income increased $9 million, or eight
percent, in 2007, compared to a decrease of $7 million, or
five percent, in 2006. The following table illustrates
fluctuations in certain categories included in other
noninterest income on the consolidated statements of
income.

Compensation deferred by the Corporations officers is
invested in stocks and bonds to reflect the investment
selections of the officers. Income earned on these assets is
reported in noninterest income and the offsetting increase in
the liability is reported in salaries expense.

Management expects low single-digit growth in noninterest income
in 2008 from 2007 levels.

28

Noninterest
Expenses

Years Ended December 31

2007

2006

2005

(in millions)

Salaries

$

844

$

823

$

786

Employee benefits

193

184

178

Total salaries and employee benefits

1,037

1,007

964

Net occupancy expense

138

125

118

Equipment expense

60

55

53

Outside processing fee expense

91

85

77

Software expense

63

56

49

Customer services

43

47

69

Litigation and operational losses

18

11

14

Provision for credit losses on lending-related commitments

(1

)

5

18

Other noninterest expenses

242

283

251

Total noninterest expenses

$

1,691

$

1,674

$

1,613

Noninterest expenses increased $17 million, or one percent,
to $1,691 million in 2007, compared to $1,674 million
in 2006, and increased $61 million, or four percent, in
2006, from $1,613 million in 2005. Increases in regular
salaries ($16 million), net occupancy and equipment
expenses ($18 million), employee benefits
($9 million), and a $13 million charge in 2007 related
to the Corporations membership in Visa, were substantially
offset by a decrease due to the prospective change in
classification of interest on tax liabilities to provision
for income taxes in 2007 ($38 million). For further
discussion of interest on tax liabilities, refer to Note 1
to the consolidated financial statements on page 72 and to
the section in this financial review entitled Income Taxes
and Tax-Related Items. In addition, noninterest expenses
included approximately $6 million of costs related to the
2007 relocation of the Corporations headquarters to
Dallas, Texas, reflected in salaries and other noninterest
expenses. An analysis of increases and decreases by individual
line item is presented below.

The following table summarizes the various components of
salaries and employee benefits expense.

Years Ended December 31

2007

2006

2005

(in millions)

Salaries

Regular salaries (including contract labor)

$

635

$

619

$

582

Severance

4

8

6

Incentives

138

134

155

Deferred compensation plan costs

8

5



Share-based compensation

59

57

43

Total salaries

844

823

786

Employee benefits

Pension expense

36

39

31

Other employee benefits

157

145

147

Total employee benefits

193

184

178

Total salaries and employee benefits

$

1,037

$

1,007

$

964

Salaries expense increased $21 million, or three percent,
in 2007, compared to an increase of $37 million, or five
percent, in 2006. The increase in 2007 was primarily due to
increases in regular salaries of $16 million and incentive
compensation of $4 million. The increase in regular
salaries in 2007 was primarily the result of annual merit
increases of approximately $18 million, partially offset by
a decline in contract labor costs associated with
technology-related projects. In addition, staff size increased
approximately 80 full-time equivalent employees

29

from year-end 2006 to year-end 2007, including approximately
140 full-time equivalent employees added in new banking
centers. The increase in incentive compensation was primarily
due to increased incentives tied to peer-based comparisons of
corporate results. Severance included $2 million in 2007
related to the relocation of the Corporations headquarters
to Dallas, Texas. The increase in 2006 was primarily due to
increases in regular salaries of $37 million and
shared-based compensation of $14 million. The increase in
regular salaries in 2006 was primarily the result of annual
merit increases of approximately $17 million and increased
contract labor costs associated with technology-related
projects. In addition, staff size from continuing operations
increased approximately 65 full-time equivalent employees
from year-end 2005 to year-end 2006. Shared-based compensation
expense increased in 2006 primarily as a result of adopting the
requisite service period provisions of SFAS 123 (revised
2004) (SFAS 123(R)), Shared-Based Payment,
effective January 1, 2006, as discussed in Notes 1 and
15 to the consolidated financial statements on pages 72 and 95,
respectively. These increases were partially offset by a
$16 million decline in incentives.

Employee benefits expense increased $9 million, or five
percent, in 2007, compared to an increase of $6 million, or
three percent, in 2006. The increase in 2007 resulted primarily
from an increase in defined contribution plan expense, mostly
from a change in the Corporations core matching
contribution rate effective January 1, 2007. The increase
in 2006 resulted primarily from an increase in pension expense.
For a further discussion of pension and defined contribution
plan expense, refer to the Critical Accounting
Policies on page 62 of this financial review and
Note 16 to the consolidated financial statements on
page 97.

Net occupancy and equipment expense increased $18 million,
or ten percent, to $198 million in 2007, compared to an
increase of $9 million, or six percent, in 2006. Net
occupancy and equipment expense increased $9 million and
$7 million in 2007 and 2006, respectively, due to the
addition of 30 new banking centers in 2007, 25 in 2006 and 18 in
2005.

Outside processing fee expense increased $6 million, or
seven percent, to $91 million in 2007, from
$85 million in 2006, compared to an increase of
$8 million, or 10 percent, in 2006. The 2007 increase
is from higher volume in activity-based processing charges, in
part related to outsourcing. The 2006 increase in outside
processing fees resulted primarily from the outsourcing of
certain trust and retirement services processing and a new
electronic bill payment service marketed to corporate customers
in 2006.

Software expense increased $7 million, or 12 percent,
in 2007, compared to an increase of $7 million, or
15 percent in 2006. The increases in both 2007 and 2006
were primarily due to increased investments in technology and
the implementation of several systems, including tools for a
sales tracking system in the banking centers, anti-money
laundering initiatives and a corporate banking portal,
increasing both amortization and maintenance costs.

Customer services expense decreased $4 million, or seven
percent, to $43 million in 2007, from $47 million in
2006, and decreased $22 million, or 33 percent, in
2006, from $69 million in 2005. Customer services expense
represents compensation provided to customers, and is one method
to attract and retain title and escrow deposits in the Financial
Services Division. The amount of customer services expense
varies from period to period as a result of changes in the level
of noninterest-bearing deposits and low-rate loans in the
Financial Services Division and the earnings credit allowances
provided on these deposits, as well as a competitive environment.

Litigation and operational losses increased $7 million, or
55 percent, to $18 million in 2007, from
$11 million in 2006, and decreased $3 million, or
17 percent, in 2006, compared to $14 million in 2005.
Litigation and operational losses include traditionally defined
operating losses, such as fraud or processing problems, as well
as uninsured losses and litigation losses. These expenses are
subject to fluctuation due to timing of authorized and actual
litigation settlements as well as insurance settlements. The
increase in 2007 reflected $13 million to record an
estimated liability related to membership in Visa, partially
offset by a litigation-related insurance settlement of
$8 million received in the second quarter 2007. Members of
the Visa card association participate in a loss sharing
arrangement to allocate financial responsibilities arising from
any potential adverse resolution of certain antitrust lawsuits
challenging the practices of the association. The Corporation
believes that its share of the proceeds from an expected initial
public offering of Visa, anticipated in early 2008, will exceed
its share of recorded losses.

The provision for credit losses on lending-related commitments
was a negative provision of $1 million in 2007, compared to
provisions of $5 million and $18 million in 2006 and
2005, respectively. For additional

30

information on the provision for credit losses on
lending-related commitments, refer to Notes 1 and 20 to the
consolidated financial statements on pages 72 and 107,
respectively, and the Provision for Credit Losses
section on page 26 of this financial review.

Other noninterest expenses decreased $41 million, or
14 percent, in 2007, compared to an increase of
$32 million, or 13 percent, in 2006. The decrease in
2007 was primarily the result of the prospective change in
classification of interest on tax liabilities to provision
for income taxes in 2007. The following table illustrates
the fluctuations in certain categories included in other
noninterest expenses on the consolidated statements of
income. For a further discussion of interest on tax liabilities,
refer to Income Taxes and Tax-Related Items below.

Years Ended December 31

2007

2006

2005

(in millions)

Other noninterest expenses

Interest on tax liabilities

$

N/A

$

38

$

11

Charitable Foundation Contribution

2

10

10

Other real estate expenses

7

4

12

N/A- Not Applicable

Management expects a low single-digit decline in noninterest
expenses in 2008 compared to 2007 levels, excluding the
provision for credit losses on lending-related commitments and
including the impact of a 2008 change in the application of
FAS 91 discussed in the 2008 guidance provided on
page 22 of this financial review.

The Corporations efficiency ratio (total noninterest
expenses as a percentage of total revenue (FTE) excluding net
securities gains) decreased to 58.58 percent in 2007,
compared to 58.92 percent in 2006 and 58.01 percent in
2005. The efficiency ratio declined in 2007 primarily due to
increased income levels and increased in 2006 primarily due to
higher expense levels.

Income
Taxes And Tax-Related Items

The provision for income taxes was $306 million in 2007,
compared to $345 million in 2006 and $393 million in
2005. The provision for income tax in 2007 included a
$9 million reduction ($6 million after-tax) of
interest resulting from a settlement with the Internal Revenue
Service (IRS) on a refund claim. The provision for income taxes
in 2006 was impacted by the completion of an IRS audit of
federal tax returns for years 1996 through 2000, the settlement
of various refund claims and an adjustment to tax reserves. In
the first quarter 2006, tax reserves, which include the
provision for income taxes and interest expense on tax
liabilities (included in other noninterest expenses
in 2006 and 2005) were adjusted to reflect the resolution
of those tax years and to reflect an updated assessment of
reserves on certain types of structured lease transactions and a
series of loans to foreign borrowers. Interest on tax
liabilities was also reduced by $6 million in the second
quarter 2006, upon settlement of various refund claims with the
IRS. As previously disclosed in quarterly and annual SEC filings
under the heading Tax Contingency, the IRS
disallowed the benefits related to a series of loans to foreign
borrowers. The Corporation has had ongoing discussions with the
IRS related to the disallowance. In the fourth quarter 2006,
based on settlements discussed, the Corporation recorded a
charge to its tax reserves for the disallowed loan benefits. The
following table summarizes the impact of the items described
above on the Corporations consolidated statement of income
for the year ended December 31, 2006.

Year Ended December 31, 2006

Interest on Tax Liabilities

Provision for

Pre-tax

After-tax

Income Taxes

(in millions)

Completion of IRS audit of the Corporations federal income
tax returns for
1996-2000

$

24

$

15

$

(16

)

Settlement of various refund claims

(6

)

(4

)

(2

)

Adjustment to tax reserves on a series of loans to foreign
borrowers

14

9

22

Total tax-related items

$

32

$

20

$

4

31

The effective tax rate, computed by dividing the provision for
income taxes by income from continuing operations before income
taxes, was 31.0 percent in 2007, 30.6 percent in 2006
and 32.5 percent in 2005. Changes in the effective tax rate
in 2007 from 2006, and 2006 from 2005, are disclosed in
Note 17 to the consolidated financial statements on
page 103. The Corporation had a net deferred tax liability
of $146 million at December 31, 2007. Included in net
deferred taxes at December 31, 2007 were deferred tax
assets of $514 million, net of a $2 million valuation
allowance established for certain state deferred tax assets. A
valuation allowance is provided when it is
more-likely-than-not that some portion of the
deferred tax asset will not be realized. Deferred tax assets are
evaluated for realization based on available evidence and
assumptions made regarding future events. In the event that the
future taxable income does not occur in the manner anticipated,
other initiatives could be undertaken to preclude the need to
recognize a valuation allowance against the deferred tax asset.

On January 1, 2007, the Corporation adopted the provisions
of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109, (FIN 48). As a result,
the Corporation recognized an increase in the liability for
unrecognized tax benefits of approximately $18 million at
January 1, 2007, accounted for as a change in accounting
principle via a decrease to the opening balance of retained
earnings ($13 million net of tax). Prior disclosures on the
change in unrecognized tax benefits resulting from the adoption
of FIN 48 were adjusted to address an uncertain tax
position that was incorrectly assessed at the time of adoption.
The facts and circumstances surrounding this uncertain tax
position were unchanged since January 1, 2007. For further
discussion of FIN 48 refer to Note 17 to the
consolidated financial statements on page 103.

In July, 2007, the State of Michigan replaced its current Single
Business Tax (SBT) with a new Michigan Business Tax (MBT).
Financial institutions are subject to an industry-specific tax
which is based on net capital, effective January 1, 2008.
Management believes the MBT will have an immaterial effect on
the Corporations financial condition and results of
operations when compared to the SBT. Both the SBT and MBT, when
effective, are recorded in Other noninterest
expenses on the consolidated statements of income.

Management expects an effective tax rate for the full-year 2008
of about 32 percent.

Income
From Discontinued Operations, Net Of Tax

Income from discontinued operations, net of tax, was
$4 million in 2007, compared to $111 million in 2006
and $45 million in 2005. Income from discontinued
operations in 2007 reflected an adjustment to the initial gain
recorded on the sale of the Corporations Munder subsidiary
in 2006. Included in 2006 was a $108 million after-tax gain
on the sale of Munder in the fourth quarter 2006. The Munder
sale agreement included an interest-bearing contingent note with
an initial principal amount of $70 million, which will be
realized if the Corporations client-related revenues
earned by Munder remain consistent with 2006 levels of
approximately $17 million per year for the five years
following the closing of the transaction
(2007-2011).
Future gains related to the contingent note are expected to be
recognized periodically as targets for the Corporations
client-related revenues earned by Munder are achieved. The
potential future gains are expected to be recorded between 2008
and the fourth quarter of 2011, unless fully earned prior to
that time. Included in 2005 was a $32 million after-tax
gain in the fourth quarter 2005 that resulted from Munders
sale of its minority interest in Framlington Group Limited
(Framlington) (a London, England based investment manager). For
further information on discontinued operations, refer to
Note 26 to the consolidated financial statements on
page 127.

The Corporations operations are strategically aligned into
three major business segments: the Business Bank, the Retail
Bank and Wealth & Institutional Management. These
business segments are differentiated based upon the products and
services provided. In addition to the three major business
segments, the Finance Division is also reported as a segment.
The Other category includes discontinued operations and items
not directly associated with these business segments or the
Finance Division. Note 24 to the consolidated financial
statements on page 119 describes the business activities of
each business segment and the methodologies which form the basis
for these results, and presents financial results of these
business segments for the years ended December 31, 2007,
2006 and 2005.

The following table presents net income (loss) by business
segment.

Years Ended December 31

2007

2006

2005

(dollar amounts in millions)

Business Bank

$

503

75

%

$

589

74

%

$

658

74

%

Retail Bank

99

15

144

18

174

19

Wealth & Institutional Management

70

10

61

8

63

7

672

100

%

794

100

%

895

100

%

Finance

4

(18

)

(71

)

Other*

10

117

37

Total

$

686

$

893

$

861

*

Includes discontinued operations and items not directly
associated with the three major business segments or the Finance
Division.

The Business Banks net income decreased $86 million,
or 15 percent, to $503 million in 2007, compared to a
decrease of $69 million, or 11 percent, to
$589 million in 2006. Net interest income (FTE) was
$1.3 billion in 2007, an increase of $11 million, or
one percent, compared to 2006. The increase in net interest
income (FTE) was primarily due to a $2.7 billion increase
in average loan balances (excluding Financial Services Division)
and a $524 million increase in average deposit balances
(excluding Financial Services Division), partially offset by a
decline in loan and deposit spreads. The provision for loan
losses increased $164 million in 2007, from
$14 million in 2006, primarily due to an increase in
reserves in 2007 for the residential real estate development
business, a reserve related to a single customer in the
Technology and Life Sciences business line and credit
improvements recognized in 2006, partially offset by a decrease
in reserves related to the automotive industry in 2007.
Excluding a $47 million Financial Services Division-related
lawsuit settlement recorded in 2006 and a $12 million loss
on the sale of the Mexican bank charter in 2006, noninterest
income increased $21 million from 2006. The increase was
primarily due to net securities gains of $7 million in 2007
and increases in commercial lending fees ($7 million) and
card fees ($4 million) in 2007, when compared to 2006.
Noninterest expenses of $708 million for 2007 decreased
$33 million from 2006, primarily due to a $16 million
decrease in allocated net corporate overhead expense, an
$8 million decrease in provision for credit losses on
lending-related commitments, and $8 million in legal fees
recorded in 2006 related to the Financial Services
Division-related lawsuit settlement noted previously. The
corporate overhead allocation rates used were six percent and
seven percent in 2007 and 2006, respectively. The one percentage
point decrease in rate in 2007, when compared to 2006, resulted
mostly from income tax related items.

The Retail Banks net income decreased $45 million, or
31 percent, to $99 million in 2007, compared to a
decrease of $30 million, or 18 percent, to
$144 million in 2006. Net interest income (FTE) of
$627 million decreased $10 million, or two percent, in
2007, primarily due to decreases in loan and deposit spreads,
partially offset by the benefit of a $349 million increase
in average deposit balances. The provision for loan losses
increased $18 million in 2007 primarily due to increases in
credit-related reserves for Small Business Administration (SBA)
loans and Small Business lending. Noninterest income of
$220 million increased $10 million from 2006,
primarily due to a $3 million increase in card fees and a
$2 million increase in income from the sale of SBA loans.
Noninterest expenses of

33

$655 million for 2007 increased $47 million from 2006,
partially due to increases in salaries and employee benefits
expense ($17 million), net occupancy expenses
($9 million) primarily related to the addition of new
banking centers, outside processing fees ($5 million) and a
charge related to the Corporations membership in Visa
($13 million). Partially offsetting these increases was an
$8 million decrease in allocated net corporate overhead
expenses. Refer to the Business Bank discussion above for an
explanation of the decrease in allocated net corporate overhead
expenses. The Corporation opened 30 new banking centers in 2007
and 25 new banking centers in 2006, contributing
$56 million to noninterest expenses in 2007, an increase of
$23 million compared to 2006.

Wealth & Institutional Managements net income
increased $9 million, or 14 percent, to
$70 million in 2007, compared to a decrease of
$2 million, or three percent, to $61 million in 2006.
Net interest income (FTE) of $145 million decreased
$2 million, or two percent, in 2007, compared to 2006, as
decreases in loan spreads and average deposit balances were
partially offset by an increase in average loan balances of
$403 million from 2006. The provision for loan losses
decreased $4 million, primarily due to an improvement from
one large customer in the Midwest market. Noninterest income of
$283 million increased $24 million, or
10 percent, in 2007, primarily due to a $19 million
increase in fiduciary income and a $3 million increase in
brokerage fees. Noninterest expenses of $322 million
increased $9 million from 2006, primarily due to a
$7 million increase in salaries and employee benefits
expense and a $3 million increase in outside processing fee
expense, partially offset by a $4 million decrease in
allocated net corporate overhead expenses. Refer to the Business
Bank discussion above for an explanation of the decrease in
allocated net corporate overhead expenses.

Net income in the Finance Division was $4 million in 2007,
compared to a net loss of $18 million in 2006. Contributing
to the increase in net income was a $31 million increase in
net interest income (FTE), primarily due to the rising rate
environment in the first three quarters of the year, during
which time interest income received from the lending-related
business units increased faster than the longer-term value
attributed to deposits generated by the business units, and the
maturity of swaps with negative spreads, partially offset by an
increase in wholesale funding.

Net income in the Other category was $10 million for 2007,
compared to $117 million for 2006. Income from discontinued
operations, net of tax, was $4 million in 2007, compared to
$111 million for 2006. Discontinued operations in 2006
included a $108 million after-tax gain on the sale of the
Corporations Munder subsidiary. Noninterest income
increased $12 million from 2006, primarily due to a
$4 million increase in net income from principal investing
and warrants and a $4 million increase in deferred
compensation asset returns. The remaining difference is due to
timing differences between when corporate overhead expenses are
reflected as a consolidated expense and when the expenses are
allocated to the business segments.

Geographic
Market Segments

The Corporations management accounting system also
produces market segment results for the Corporations four
primary geographic markets: Midwest, Western, Texas and Florida.
In addition to the four primary geographic markets, Other
Markets and International are also reported as market segments.
The Finance & Other Businesses category includes
discontinued operations. Note 24 to the consolidated
financial statements on page 119 presents a description of
each of these market segments as well as the financial results
for the years ended December 31, 2007, 2006 and 2005.

34

The following table presents net income (loss) by market segment.

Years Ended December 31

2007

2006

2005

(dollar amounts in millions)

Midwest

$

277

42

%

$

319

41

%

$

351

39

%

Western

170

25

273

34

338

38

Texas

79

12

82

10

89

10

Florida

7

1

14

2

15

2

Other Markets

89

13

72

9

62

7

International

50

7

34

4

40

4

672

100

%

794

100

%

895

100

%

Finance & Other Businesses*

14

99

(34

)

Total

$

686

$

893

$

861

*

Includes discontinued operations and items not directly
associated with the market segments.

The Midwest markets net income decreased $42 million,
or 14 percent, to $277 million in 2007, compared to a
decrease of $32 million, or nine percent, to
$319 million in 2006. Net interest income (FTE) of
$863 million decreased $45 million from 2006,
primarily due to a decrease in loan spreads. The provision for
loan losses increased $11 million, primarily due to an
increase in residential real estate development reserves in
2007, compared to 2006, partially offset by a decrease in
reserves related to the automotive industry in 2007. Noninterest
income of $471 million increased $19 million from 2006
due to a $10 million increase in fiduciary income, a
$6 million increase in card fees and a $3 million
increase in brokerage fees. Noninterest expenses of
$821 million increased $10 million from 2006,
primarily due to a $10 million charge related to the
Corporations membership in Visa allocated to the Midwest
market in 2007, a $5 million increase in salaries and
employee benefits expense and a $4 million increase in
litigation and operational losses, partially offset by a
$5 million decrease in allocated net corporate overhead
expenses. Refer to the Business Bank discussion above for an
explanation of the decrease in allocated net corporate overhead
expenses. The Corporation opened two new banking centers and
consolidated five banking centers in Michigan in 2007. In
addition, 22 banking centers in Michigan were refurbished in
2007.

The Western markets net income decreased
$103 million, or 38 percent, to $170 million in
2007, compared to a decrease of $65 million, or
19 percent, to $273 million in 2006. Net interest
income (FTE) of $706 million increased $5 million, or
one percent, in 2007. The increase in net interest income (FTE)
was primarily due to a $1.7 billion increase in average
loan balances (excluding Financial Services Division) and an
$823 million increase in average deposit balances
(excluding Financial Services Division), partially offset by a
decrease in net interest income from the Financial Services
Division and declining loan and deposit spreads. Average
low-rate Financial Services Division loan balances declined
$1.0 billion in 2007 and average Financial Services
Division deposits declined $2.1 billion. The provision for
loan losses increased $140 million, primarily due to an
increase in credit risk in the California residential real
estate development industry in 2007, compared to overall credit
improvements in 2006. Noninterest income was $131 million
in 2007, a decrease of $29 million from 2006, primarily due
to a $47 million Financial Services Division-related
lawsuit settlement in 2006, partially offset by a
$5 million increase in customer derivative income and a
$2 million increase in income from the sale of SBA loans.
Noninterest expenses of $455 million increased
$5 million, primarily due to a $12 million increase in
expenses related to the addition of new banking centers, mostly
salaries and employee benefits expense and net occupancy
expense. These increases were partially offset by an
$8 million decrease in legal fees related to the Financial
Services Division-related lawsuit settlement and an
$8 million decrease in allocated net corporate overhead
expenses. Refer to the Business Bank discussion above for an
explanation of the decrease in allocated net corporate overhead
expenses. The Corporation opened 16 new banking centers in the
Western market in 2007. In addition, two banking centers in the
Western market were relocated and two were refurbished in 2007.

The Texas markets net income decreased $3 million, or
three percent, to $79 million in 2007, compared to a
decrease of $7 million, to $82 million in 2006. Net
interest income (FTE) of $279 million increased
$18 million, or seven percent, in 2007, compared to 2006.
The increase in net interest income (FTE) was primarily due to
an increase in average loan and deposit balances, partially
offset by a decrease in loan spreads. The provision for loan
losses increased $10 million, primarily due to credit
improvements recognized in 2006. Noninterest income of

35

$86 million increased $10 million from 2006, primarily
due to a $4 million increase in commercial lending fees and
increases in various other fee categories. Noninterest expenses
of $235 million increased $19 million from 2006,
partially due to a $9 million increase in salaries and
employee benefits expense and a $2 million increase in net
occupancy expense, primarily related to the addition of new
banking centers. These increases were partially offset by a
$3 million decrease in allocated net corporate overhead
expenses. Refer to the Business Bank discussion above for an
explanation of the decrease in allocated net corporate overhead
expenses. The Corporation opened 12 new banking centers in the
Texas market in 2007, which resulted in a $7 million
increase in noninterest expenses. In addition, one banking
center in the Texas market was relocated and three were
refurbished in 2007.

The Florida markets net income decreased $7 million,
or 46 percent, to $7 million in 2007, compared to a
decrease of $1 million, to $14 million in 2006. Net
interest income (FTE) of $47 million increased
$4 million, or nine percent, from 2006, primarily due to a
$164 million increase in average loan balances. The
provision for loan losses increased $8 million, primarily
due to an increase in residential real estate development
industry reserves in 2007, compared to 2006. Noninterest income
of $14 million was unchanged from 2006. Noninterest
expenses of $39 million increased $5 million from the
comparable period in the prior year, partially due to a
$2 million increase in salaries and employee benefit
expenses.

The Other Markets net income increased $17 million to
$89 million in 2007, compared to 2006. Net interest income
(FTE) of $136 million increased $18 million from 2006,
primarily due to a $443 million increase in average loan
balances and a $133 million increase in average deposit
balances. The provision for loan losses increased
$10 million, primarily due to an increase in residential
real estate development industry reserves in 2007. Noninterest
income of $54 million increased $2 million in 2007
compared to 2006. Noninterest expenses of $92 million
decreased $9 million from the comparable period in the
prior year, primarily due to an $8 million decrease in the
provision for credit losses on lending-related commitments.

The International markets net income increased
$16 million, to $50 million in 2007, compared to 2006.
Net interest income (FTE) of $67 million decreased
$1 million from the comparable period in the prior year.
The provision for loan losses was negative in both 2007 and
2006, due to credit improvements. Noninterest income of
$38 million increased $18 million from 2006, primarily
due to a $12 million loss on the sale of the Mexican bank
charter in the third quarter 2006 and a $4 million increase
in net securities gains in 2007. Noninterest expenses of
$43 million decreased $7 million in 2007 compared to
2006, reflecting a decrease in salaries and employee benefit
expenses and nominal decreases in other expense categories.

Net income for the Finance & Other Business segment
was $14 million in 2007, compared to $99 million for
2006. Income from discontinued operations, net of tax, was
$4 million in 2007, compared to $111 million for 2006.
Discontinued operations in 2006 included a $108 million
after-tax gain on the sale of the Corporations Munder
subsidiary. Net interest income (FTE) increased
$21 million, primarily due to the rising rate environment
in the first three quarters of the year, during which time
interest income received from the lending-related business units
increased faster than the longer-term value attributed to
deposits generated by the business units, and the maturity of
swaps with negative spreads, partially offset by an increase in
wholesale funding. Noninterest income increased
$13 million, primarily due to a $4 million increase in
net income from principal investing and warrants and a
$4 million increase in deferred compensation asset returns.
The remaining difference is due to timing differences between
when corporate overhead expenses are reflected as a consolidated
expense and when the expenses are allocated to the business
segments.

The following table lists the Corporations banking centers
by geographic market segments.

December 31

2007

2006

2005

Midwest (Michigan)

237

240

250

Western:

California

83

70

58

Arizona

8

5

3

91

75

61

Texas

79

68

61

Florida

9

9

6

International

1

1

5

Total

417

393

383

36

BALANCE
SHEET AND CAPITAL FUNDS ANALYSIS

Total assets were $62.3 billion at December 31, 2007,
an increase of $4.3 billion from $58.0 billion at
December 31, 2006. On an average basis, total assets
increased to $58.6 billion in 2007, from $56.6 billion
in 2006, an increase of $2.0 billion, resulting primarily
from a $2.4 billion increase in earning assets. The
Corporation also recorded a $140 million decrease in
average deposits, a $574 million decrease in average
short-term borrowings and a $2.8 billion increase in
average medium- and long-term debt in 2007, compared to 2006.

TABLE 4:
ANALYSIS OF INVESTMENT SECURITIES AND LOANS

December 31

2007

2006

2005

2004

2003

(in millions)

Investment securities available-for-sale:

U.S. Treasury and other Government agency securities

$

36

$

46

$

124

$

192

$

188

Government-sponsored enterprise securities

6,165

3,497

3,954

3,564

4,121

State and municipal securities

3

4

4

7

11

Other securities

92

115

158

180

169

Total investment securities available-for-sale

$

6,296

$

3,662

$

4,240

$

3,943

$

4,489

Commercial loans

$

28,223

$

26,265

$

23,545

$

22,039

$

21,579

Real estate construction loans:

Commercial Real Estate business line

4,089

3,449

2,831

2,461

2,754

Other business lines

727

754

651

592

643

Total real estate construction loans

4,816

4,203

3,482

3,053

3,397

Commercial mortgage loans:

Commercial Real Estate business line

1,377

1,534

1,450

1,556

1,655

Other business lines

8,671

8,125

7,417

6,680

6,223

Total commercial mortgage loans

10,048

9,659

8,867

8,236

7,878

Residential mortgage loans

1,915

1,677

1,485

1,294

1,228

Consumer loans:

Home equity

1,616

1,591

1,775

1,837

1,647

Other consumer

848

832

922

914

963

Total consumer loans

2,464

2,423

2,697

2,751

2,610

Lease financing

1,351

1,353

1,295

1,265

1,301

International loans:

Government and official institutions





3

4

12

Banks and other financial institutions

27

47

46

11

45

Commercial and industrial

1,899

1,804

1,827

2,190

2,252

Total international loans

1,926

1,851

1,876

2,205

2,309

Total loans

$

50,743

$

47,431

$

43,247

$

40,843

$

40,302

37

TABLE 5:
LOAN MATURITIES AND INTEREST RATE SENSITIVITY

December 31, 2007

Loans Maturing

After One

Within

But Within

After

One Year*

Five Years

Five Years

Total

(in millions)

Commercial loans

$

21,608

$

5,561

$

1,054

$

28,223

Real estate construction loans

3,813

792

211

4,816

Commercial mortgage loans

3,953

4,482

1,613

10,048

International loans

1,777

115

34

1,926

Total

$

31,151

$

10,950

$

2,912

$

45,013

Sensitivity of Loans to Changes in Interest Rates:

Predetermined (fixed) interest rates

$

4,347

$

2,330

Floating interest rates

6,603

582

Total

$

10,950

$

2,912

* Includes demand loans, loans having no stated repayment
schedule or maturity and overdrafts.

Earning
Assets

Total earning assets increased to $57.4 billion at
December 31, 2007, from $54.1 billion at
December 31, 2006. The Corporations average earning
assets balances are reflected in Table 2 on page 23.

The following table details the Corporations average loan
portfolio by loan type, business line and geographic market.

Years Ended December 31

Percent

2007

2006

Change

Change

(dollar amounts in millions)

Average Loans By Loan Type:

Commercial loans:

Excluding Financial Services Division

$

26,814

$

24,978

$

1,836

7

%

Financial Services Division*

1,318

2,363

(1,045

)

(44

)

Total commercial loans

28,132

27,341

791

3

Real estate construction loans:

Commercial real estate business line

3,799

3,184

615

19

Other business lines

753

721

32

4

Total real estate construction loans

4,552

3,905

647

17

Commercial mortgage loans:

Commercial real estate business line

1,390

1,504

(114

)

(8

)

Other business lines

8,381

7,774

607

8

Total commercial mortgage loans

9,771

9,278

493

5

Residential mortgage loans

1,814

1,570

244

16

Consumer loans:

Home equity

1,580

1,705

(125

)

(7

)

Other consumer

787

828

(41

)

(5

)

Total consumer loans

2,367

2,533

(166

)

(7

)

Lease financing

1,302

1,314

(12

)

(1

)

International loans

1,883

1,809

74

4

Total loans

$

49,821

$

47,750

$

2,071

4

%

38

Years Ended December 31

Percent

2007

2006

Change

Change

(dollar amounts in millions)

Average Loans By Business Line:

Middle Market

$

16,185

$

15,386

$

799

5

%

Commercial Real Estate

6,717

6,397

320

5

Global Corporate Banking

5,471

4,871

600

12

National Dealer Services

5,187

4,937

250

5

Specialty Businesses:

Excluding Financial Services Division

4,843

4,127

716

17

Financial Services Division*

1,318

2,363

(1,045

)

(44

)

Total Specialty Businesses

6,161

6,490

(329

)

(5

)

Total Business Bank

39,721

38,081

1,640

4

Small Business

4,023

3,828

195

5

Personal Financial Services

2,111

2,256

(145

)

(6

)

Total Retail Bank

6,134

6,084

50

1

Private Banking

3,937

3,534

403

11

Total Wealth & Institutional Management

3,937

3,534

403

11

Finance/Other

29

51

(22

)

(44

)

Total loans

$

49,821

$

47,750

$

2,071

4

%

Average Loans By Geographic Market:

Midwest

$

18,598

$

18,737

$

(139

)

(1

)%

Western:

Excluding Financial Services Division

15,212

13,519

1,693

13

Financial Services Division*

1,318

2,363

(1,045

)

(44

)

Total Western

16,530

15,882

648

4

Texas

6,827

5,911

916

16

Florida

1,672

1,508

164

11

Other Markets

4,041

3,598

443

12

International

2,124

2,063

61

3

Finance/Other

29

51

(22

)

(44

)

Total loans

$

49,821

$

47,750

$

2,071

4

%

* Financial Services Division includes primarily low-rate
loans

Total loans were $50.7 billion at December 31, 2007,
an increase of $3.3 billion from $47.4 billion at
December 31, 2006. Total loans, on an average basis,
increased $2.0 billion, or four percent,
($3.1 billion, or seven percent, excluding Financial
Services Division loans), to $49.8 billion in 2007, from
$47.8 billion in 2006. Within average loans, most business
lines and geographic markets showed growth. The Corporation
continues to make progress toward the goal of achieving more
geographic balance, with markets outside of the Midwest
comprising 62 percent of average total loans (excluding
Financial Services Division loans and loans in the
Finance & Other Businesses category) in 2007, compared
to 59 percent in 2006.

Average commercial real estate loans, consisting of real estate
construction and commercial mortgage loans, increased
$1.1 billion, or nine percent, to $14.3 billion in
2007, from $13.2 billion in 2006. Commercial mortgage loans
are loans where the primary collateral is a lien on any real
property. Real property is generally considered primary
collateral if the value of that collateral represents more than
50 percent of the commitment at loan approval. Average
loans to borrowers in the Commercial Real Estate business line,
which include loans to residential real estate developers,
represented $5.2 billion, or 36 percent, of average
total commercial real estate loans in 2007, compared to
$4.7 billion, or 36 percent, of average total
commercial real estate loans in 2006. The increase in average
commercial real estate loans to borrowers in the Commercial Real
Estate business line in 2007 largely included draws on
previously approved lines of credit for residential real estate
and commercial

39

development projects and new loans for commercial development
projects. The remaining $9.1 billion and $8.5 billion
of commercial real estate loans in other business lines in 2007
and 2006, respectively, were primarily owner-occupied commercial
mortgages. In addition to the $14.3 billion of average 2007
commercial real estate loans discussed above, the Commercial
Real Estate business line also had $1.5 billion of average
2007 loans not classified as commercial real estate on the
consolidated balance sheet. Refer to page 52 under
Commercial Real Estate Lending in the Risk Management section
for more information.

Average residential mortgage loans increased $244 million,
or 16 percent, from 2006, and primarily include mortgages
originated and retained for certain relationship customers.

Average home equity loans decreased $125 million, or seven
percent, from 2006, as a result of a decrease in draws on
commitments extended.

Loans classified as Shared National Credit (SNC) loans totaled
$10.9 billion (approximately 1,090 borrowers) at
December 31, 2007, compared to $8.8 billion
(approximately 1,000 borrowers) at December 31, 2006. SNC
loans are facilities greater than $20 million shared by
three or more federally supervised financial institutions which
are reviewed by regulatory authorities at the agent bank level.
The Corporation generally seeks to obtain ancillary business at
origination of the SNC relationship, or within two years
thereafter. These loans, diversified by both line of business
and geography, comprised approximately 21 percent and
19 percent of total loans at December 31, 2007 and
2006, respectively.

Management currently expects average loan growth for 2008 to be
in the mid to high single-digit range, excluding Financial
Services Division loans, with flat growth in the Midwest market,
high single-digit growth in the Western market and low
double-digit growth in the Texas market, compared to 2007.

Investment securities available-for-sale increased
$2.6 billion to $6.3 billion at December 31,
2007, from $3.7 billion at December 31, 2006. Average
investment securities available-for-sale increased
$455 million to $4.4 billion in 2007, compared to
$4.0 billion in 2006, primarily due to a $470 million
increase in average U.S. Treasury, Government agency, and
Government-sponsored enterprise securities. Changes in
U.S. Treasury, Government agency, and Government-sponsored
enterprise securities resulted from balance sheet management

40

decisions to reduce interest rate sensitivity. Average other
securities decreased $15 million to $131 million in
2007, and consisted largely of money market and other fund
investments at December 31, 2007.

Short-term investments include federal funds sold and securities
purchased under agreements to resell, and other short-term
investments. Federal funds sold offer supplemental earning
opportunities and serve correspondent banks. Average federal
funds sold and securities purchased under agreements to resell
declined $119 million to $164 million during 2007,
compared to 2006. Other short-term investments include
interest-bearing deposits with banks, trading securities, and
loans held-for-sale. Interest-bearing deposits with banks are
investments with banks in developed countries or foreign
banks international banking facilities located in the
United States. Loans held-for-sale typically represent
residential mortgage loans, student loans and Small Business
Administration loans that have been originated and which
management has decided to sell. Average other short-term
investments decreased $10 million to $256 million
during 2007, compared to 2006. Short-term investments, other
than loans held-for-sale, provide a range of maturities less
than one year and are mostly used to manage short-term
investment requirements of the Corporation.

Risk management practices minimize risk inherent in
international lending arrangements. These practices include
structuring bilateral agreements or participating in bank
facilities, which secure repayment from sources external to the
borrowers country. Accordingly, such international
outstandings are excluded from the cross-border risk of that
country. Mexico, with cross-border outstandings of
$915 million, or 1.47 percent of total assets at
December 31, 2007, was the only country with outstandings
exceeding 1.00 percent of total assets at year-end 2007.
There were no countries with cross-border outstandings between
0.75 and 1.00 percent of total assets at year-end 2007.
Additional information on the Corporations Mexican
cross-border risk is provided in Table 7 above.

41

Deposits
And Borrowed Funds

The Corporations average deposits and borrowed funds
balances are detailed in the following table.

Years Ended December 31

Percent

2007

2006

Change

Change

(in millions)

Money market and NOW deposits:

Excluding Financial Services Division

$

13,735

$

13,663

$

72

1

%

Financial Services Division

1,202

1,710

(508

)

(30

)

Total money market and NOW deposits

14,937

15,373

(436

)

(3

)

Savings deposits

1,389

1,441

(52

)

(4

)

Customer certificates of deposit

7,687

6,505

1,182

18

Institutional certificates of deposit

5,563

4,489

1,074

24

Foreign office time deposits

1,071

1,131

(60

)

(5

)

Total interest-bearing deposits

30,647

28,939

1,708

6

Noninterest-bearing deposits:

Excluding Financial Services Division

8,451

8,761

(310

)

(4

)

Financial Services Division

2,836

4,374

(1,538

)

(35

)

Total noninterest-bearing deposits

11,287

13,135

(1,848

)

(14

)

Total deposits

$

41,934

$

42,074

$

(140

)



%

Short-term borrowings

$

2,080

$

2,654

$

(574

)

(22

)%

Medium- and long-term debt

8,197

5,407

2,790

52

Total borrowed funds

$

10,277

$

8,061

$

2,216

27

%

Average deposits were $41.9 billion during 2007, a decrease
of $140 million, or less than one percent, from 2006.
Excluding Financial Services Division, average deposits
increased of $1.9 billion, or five percent, from 2006. The
$1.7 billion, or six percent, increase in average
interest-bearing deposits in 2007, when compared to 2006,
resulted primarily from an increase in average customer and
institutional certificates of deposit. Institutional
certificates of deposit represent certificates of deposit issued
to institutional investors in denominations in excess of
$100,000 and are an alternative to other sources of purchased
funds. The increases in certificates of deposit were partially
offset by decreases in average money market, NOW and savings
deposits reflecting movement toward higher cost deposits as
customers sought higher returns. Average noninterest-bearing
deposits decreased $1.8 billion, or 14 percent, from
2006. Noninterest-bearing deposits include title and escrow
deposits in the Corporations Financial Services Division,
which benefit from home mortgage financing and refinancing
activity. Financial Services Division deposit levels may change
with the direction of mortgage activity changes, and the
desirability of and competition for such deposits. Average
Financial Services Division noninterest-bearing deposits
decreased $1.5 billion, to $2.8 billion in 2007.

Average short-term borrowings decreased $574 million, to
$2.1 billion in 2007, compared to $2.7 billion in
2006. Short-term borrowings include federal funds purchased,
securities sold under agreements to repurchase and treasury tax
and loan notes.

The Corporation uses medium-term debt (both domestic and
European) and long-term debt to provide funding to support
earning assets while providing liquidity that mirrors the
estimated duration of deposits. Long-term subordinated notes
further help maintain the Corporations and subsidiary
banks total capital ratios at a level that qualifies for
the lowest FDIC risk-based insurance premium. Medium- and
long-term debt increased, on an average basis, by
$2.8 billion. Further information on medium- and long-term
debt is provided in Note 11 to the consolidated financial
statements on page 89.

42

Capital

Common shareholders equity was $5.1 billion at
December 31, 2007, compared to $5.2 billion at
December 31, 2006. The following table presents a summary
of changes in common shareholders equity in 2007:

(in millions)

Balance at December 31, 2006

$

5,153

FSP 13-2
transition adjustment, net of tax

(46

)

FIN 48 transition adjustment, net of tax

(6

)

Balance at January 1, 2007

5,101

Retention of earnings (net income less cash dividends declared)

293

Change in accumulated other comprehensive income (loss):

Investment securities available-for-sale

$

52

Cash flow hedges

50

Defined benefit and other postretirement plans adjustment

45

Total change in accumulated other comprehensive income (loss)

147

Repurchase of approximately 10 million common shares

(580

)

Net issuance of common stock under employee stock plans

97

Recognition of share-based compensation expense

59

Balance at December 31, 2007

$

5,117

Further information on the change in accumulated other
comprehensive income (loss) is provided in Note 13 to the
consolidated financial statements on page 92.

The Corporation declared common dividends totaling
$393 million, or $2.56 per share, on net income applicable
to common stock of $686 million. The dividend payout ratio
calculated on a per share basis was 58 percent in 2007 and
43 percent in 2006 and 2005.

The Corporation assesses capital adequacy against the risk
inherent in the balance sheet, recognizing that unexpected loss
is the common denominator of risk and that common equity has the
greatest capacity to absorb unexpected loss. Appropriate
capitalization is therefore defined through the use of a target
capital range. The Corporation targets to maintain a Tier 1
common capital ratio of between 6.5 percent and
7.5 percent and a Tier 1 capital ratio of between
7.25 percent and 8.25 percent. The Tier 1 common
capital ratio is the regulatory Tier 1 capital ratio
excluding preferred equity. Based on an interim decision issued
by the banking regulators issued in 2006, the after-tax charge
associated with a recent accounting standard
(SFAS 158) on pension and post-retirement plan
accounting was excluded from the calculation of regulatory
capital ratios. Therefore, for the purposes of calculating
regulatory capital ratios, shareholders equity was
increased by $170 million and $215 million on
December 31, 2007 and 2006, respectively. Refer to
Note 19 on page 106 for further discussion of
regulatory capital requirements and capital ratio calculations.

When capital exceeds necessary levels, the Corporations
common stock can be repurchased as a way to return excess
capital to shareholders. Repurchasing common stock offers a
flexible way to control capital levels by adjusting the capital
deployed in reaction to core balance sheet growth. In November
2006 and again in November 2007, the Board of Directors of the
Corporation (the Board) authorized the purchase of up to
10 million shares of Comerica Incorporated outstanding
common stock in the open market. In addition to limits that
result from the Board authorizations, the share repurchase
program is constrained by holding company liquidity and capital
levels relative to internal targets and regulatory minimums. The
Corporation repurchased 10.0 million shares in the open
market in 2007 for $580 million, compared to
6.6 million shares in 2006 for $383 million. Comerica
Incorporated common stock available for repurchase under Board
authority totaled 12.6 million shares at December 31,
2007. Share repurchases combined with dividends returned
142 percent of earnings to shareholders in 2007. Refer to
Note 12 to the consolidated financial statements on
page 91 for additional information on the
Corporations share repurchase program.

At December 31, 2007, the Corporation and its
U.S. banking subsidiaries exceeded the capital ratios
required for an institution to be considered well
capitalized by the standards developed under the Federal
Deposit Insurance Corporation Improvement Act of 1991.

The Corporation assumes various types of risk in the normal
course of business. Management classifies the risk exposures
into five areas: (1) credit, (2) market and liquidity,
(3) operational, (4) compliance and (5) business
risks and considers credit risk as the most significant risk.
The Corporation employs and is continuously enhancing various
risk management processes to identify, measure, monitor and
control these risks, as described below.

The Corporation continues to enhance its risk management
capabilities with additional processes, tools and systems
designed to provide management with deeper insight into the
Corporations various risks, enhance the Corporations
ability to control those risks and ensure that appropriate
compensation is received for the risks taken.

Specialized risk managers, along with the risk management
committees in credit, market and liquidity, and operational and
compliance are responsible for the day-to-day management of
those respective risks. The Corporations Enterprise-Wide
Risk Management Committee is responsible for establishing the
governance over the risk management process as well as providing
oversight in managing the Corporations aggregate risk
position. The Enterprise-Wide Risk Management Committee is
principally made up of the various managers from the different
risk areas and business units and has reporting responsibility
to the Enterprise Risk Committee of the Board.

Credit
Risk

Credit risk represents the risk of loss due to failure of a
customer or counterparty to meet its financial obligations in
accordance with contractual terms. The Corporation manages
credit risk through underwriting, periodically reviewing and
approving its credit exposures using Board committee approved
credit policies and guidelines. Additionally, the Corporation
manages credit risk through loan sales and loan portfolio
diversification, limiting exposure to any single industry,
customer or guarantor, and selling participations
and/or
syndicating to third parties credit exposures above those levels
it deems prudent.

During 2007, the Corporation continued its focus on the credit
components of the previously described enterprise-wide risk
management processes. A two-factor risk rating system was
initiated in 2005 and was extended to all portfolios in 2006.
Enhancements to the analytics related to capital modeling,
migration, credit loss forecasting, stress testing analysis and
validation and testing continued in 2007. The evaluation of the
Corporations loan portfolios with the new tools is
anticipated to provide improved measurement of the potential
risks within the loan portfolios.

44

TABLE 8:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

Years Ended December 31

2007

2006

2005

2004

2003

(dollar amounts in millions)

Balance at beginning of year

$

493

$

516

$

673

$

803

$

791

Loan charge-offs:

Domestic

Commercial

89

44

91

201

302

Real estate construction

Commercial Real Estate business line

37



2

2

1

Other business lines

5







1

Total real estate construction

42



2

2

2

Commercial mortgage

Commercial Real Estate business line

15

4

4

4

4

Other business lines

37

13

13

19

18

Total commercial mortgage

52

17

17

23

22

Residential mortgage





1

1



Consumer

13

23

15

14

11

Lease financing



10

37

13

4

International



4

11

14

67

Total loan charge-offs

196

98

174

268

408

Recoveries:

Domestic

Commercial

27

27

55

52

28

Real estate construction











Commercial mortgage

4

4

3

3

1

Residential mortgage











Consumer

4

3

5

2

3

Lease financing

4





1



International

8

4

1

16

11

Total recoveries

47

38

64

74

43

Net loan charge-offs

149

60

110

194

365

Provision for loan losses

212

37

(47

)

64

377

Foreign currency translation adjustment

1









Balance at end of year

$

557

$

493

$

516

$

673

$

803

Allowance for loan losses as a percentage of total loans at end
of year

1.10

%

1.04

%

1.19

%

1.65

%

1.99

%

Net loans charged-off during the year as a percentage of average
loans outstanding during the year

0.30

0.13

0.25

0.48

0.86

The following table provides an analysis of the changes in the
allowance for credit losses on lending-related commitments.

Years Ended December 31

2007

2006

2005

2004

2003

(dollar amounts in millions)

Balance at beginning of year

$

26

$

33

$

21

$

33

$

35

Less: Charge-offs on lending-related commitments *

4

12

6





Add: Provision for credit losses on lending-relatedcommitments

(1

)

5

18

(12

)

(2

)

Balance at end of year

$

21

$

26

$

33

$

21

$

33

*

Charge-offs result from the sale of unfunded lending-related
commitments.

45

Allowance
for Credit Losses

The allowance for credit losses includes both the allowance for
loan losses and the allowance for credit losses on
lending-related commitments. The allowance for loan losses
represents managements assessment of probable losses
inherent in the Corporations loan portfolio. The allowance
for loan losses provides for probable losses that have been
identified with specific customer relationships and for probable
losses believed to be inherent in the loan portfolio, but that
have not been specifically identified. Internal risk ratings are
assigned to each business loan at the time of approval and are
subject to subsequent periodic reviews by the Corporations
senior management. The Corporation performs a detailed credit
quality review quarterly on both large business and certain
large personal purpose consumer and residential mortgage loans
that have deteriorated below certain levels of credit risk and
may allocate a specific portion of the allowance to such loans
based upon this review. The Corporation defines business loans
as those belonging to the commercial, real estate construction,
commercial mortgage, lease financing and international loan
portfolios. A portion of the allowance is allocated to the
remaining business loans by applying estimated loss ratios,
based on numerous factors identified below, to the loans within
each risk rating. In addition, a portion of the allowance is
allocated to these remaining loans based on industry specific
risks inherent in certain portfolios that have experienced above
average losses, including portfolio exposures to
technology-related industries, Michigan and California
residential real estate development and Small Business
Administration loans. Furthermore, a portion of the allowance is
allocated to these remaining loans based on industry specific
risks inherent in certain portfolios that have not yet
manifested themselves in the risk ratings, including portfolio
exposures to the automotive industry and California residential
real estate development. The portion of the allowance allocated
to all other consumer and residential mortgage loans is
determined by applying estimated loss ratios to various segments
of the loan portfolio. Estimated loss ratios for all portfolios
incorporate factors such as recent charge-off experience,
current economic conditions and trends, and trends with respect
to past due and nonaccrual amounts, and are supported by
underlying analysis, including information on migration and loss
given default studies from each of the three largest domestic
geographic markets (Midwest, Western and Texas), as well as
mapping to bond tables. The allowance for credit losses on
lending-related commitments, included in accrued expenses
and other liabilities on the consolidated balance sheets,
provides for probable credit losses inherent in lending-related
commitments, including unused commitments to extend credit,
letters of credit and financial guarantees. Lending-related
commitments for which it is probable that the commitment will be
drawn (or sold) are reserved with the same estimated loss rates
as loans, or with specific reserves. In general, the probability
of draw for letters of credit is considered certain once the
credit becomes a watch list credit. Non-watch list letters of
credits and all unfunded commitments have a lower probability of
draw, to which standard loan loss rates are applied.

The total allowance for loan losses was $557 million at
December 31, 2007, compared to $493 million at
December 31, 2006. The increase resulted mostly from an
increase in individual and industry reserves for customers in
the real estate industry, primarily Michigan and California
residential real estate development. This increase was partially
offset by reductions in the industry reserves for customers in
the automotive, air transportation, contractor and entertainment
industries. An analysis of the changes in the allowance for loan
losses is presented in Table 8 on page 45 of this financial
review. The allowance for credit losses on lending-related
commitments was $21 million at December 31, 2007,
compared to $26 million at December 31, 2006, a
decrease of $5 million, resulting primarily from a decrease
in specific reserves related to unused commitments extended to
two large customers in the automotive industry that were
previously reserved at quoted prices and now are reserved using
standard unfunded commitment methodology. An analysis of the
changes in the allowance for credit losses on lending-related
commitments is presented on page 45 of this financial
review.

46

TABLE 9:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

December 31

2007

2006

2005

2004

2003

Amount

%

Amount

%

Amount

%

Amount

%

Amount

%

(dollar amounts in millions)

Domestic

Commercial

$

288

55

%

$

320

55

%

$

336

55

%

$

442

54

%

$

510

54

%

Real estate construction

128

9

29

9

21

8

27

8

35

8

Commercial mortgage

92

20

80

20

74

21

88

20

104

20

Residential mortgage

2

4

2

4

1

3

2

3

5

3

Consumer

21

5

22

5

25

6

26

7

28

6

Lease financing

15

3

27

3

29

3

45

3

27

3

International

11

4

13

4

30

4

43

5

94

6

Total

$

557

100

%

$

493

100

%

$

516

100

%

$

673

100

%

$

803

100

%

Amount  allocated allowance

%  loans outstanding as a percentage of total loans

Actual loss ratios experienced in the future may vary from those
projected. The uncertainty occurs because factors may exist
which affect the determination of probable losses inherent in
the loan portfolio that are not necessarily captured by the
application of estimated loss ratios or identified
industry-specific risks. A portion of the allowance is
maintained to capture these probable losses and reflects
managements view that the allowance should recognize the
margin for error inherent in the process of estimating expected
loan losses. Factors that were considered in the evaluation of
the adequacy of the Corporations allowance include the
inherent imprecision in the risk rating system and the risk
associated with new customer relationships. The allowance
associated with the margin for inherent imprecision covers
probable loan losses as a result of an inaccuracy in assigning
risk ratings or stale ratings which may not have been updated
for recent negative trends in particular credits. The allowance
due to new business migration risk is based on an evaluation of
the risk of rating downgrades associated with loans that do not
have a full year of payment history.

The total allowance is available to absorb losses from any
segment within the portfolio. Unanticipated economic events,
including political, economic and regulatory instability in
countries where the Corporation has loans, could cause changes
in the credit characteristics of the portfolio and result in an
unanticipated increase in the allowance. Inclusion of other
industry specific portfolio exposures in the allowance, as well
as significant increases in the current portfolio exposures,
could also increase the amount of the allowance. Any of these
events, or some combination thereof, may result in the need for
additional provision for loan losses in order to maintain an
allowance that complies with credit risk and accounting policies.

The allowance as a percentage of total loans, nonperforming
loans and as a multiple of annual net loan charge-offs is
provided in the following table.

Years Ended December 31

2007

2006

2005

Allowance for loan losses as a percentage of total loans at end
of year

1.10

%

1.04

%

1.19

%

Allowance for loan losses as a percentage of total nonperforming
loans at end of year

138

231

373

Allowance for loan losses as a multiple of total net loan
charge-offs for the year

3.7

8.2

4.7

The allowance for loan losses as a percentage of total
period-end loans increased to 1.10 percent at
December 31, 2007, from 1.04 percent at
December 31, 2006. The allowance for loan losses as a
percentage of nonperforming loans decreased to 138 percent
at December 31, 2007, from 231 percent at
December 31, 2006. The allowance for loan losses as a
multiple of net loan charge-offs decreased to 3.7 times for the
year ended December 31, 2007, compared to 8.2 times for the
prior year, as a result of higher levels of net loan

47

charge-offs in 2007.
While certain ratios declined, the ratios do not reflect a
change in the methodology of developing the allowance based on
the underlying loan portfolios.

TABLE 10:
SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS

December 31

2007

2006

2005

2004

2003

(dollar amounts in millions)

NONPERFORMING ASSETS

Nonaccrual loans:

Commercial

$

75

$

97

$

65

$

161

$

295

Real estate construction:

Commercial Real Estate business line

161

18

3

31

21

Other business lines

6

2



3

3

Total real estate construction

167

20

3

34

24

Commercial mortgage:

Commercial Real Estate business line

66

18

6

6

3

Other business lines

75

54

29

58

84

Total commercial mortgage

141

72

35

64

87

Residential mortgage

1

1

2

1

2

Consumer

3

4

2

1

7

Lease financing



8

13

15

24

International

4

12

18

36

68

Total nonaccrual loans

391

214

138

312

507

Reduced-rate loans

13









Total nonperforming loans

404

214

138

312

507

Foreclosed property

19

18

24

27

30

Nonaccrual debt securities









1

Total nonperforming assets

$

423

$

232

$

162

$

339

$

538

Nonperforming loans as a percentage of total loans

0.80

%

0.45

%

0.32

%

0.76

%

1.26

%

Nonperforming assets as a percentage of total loans, foreclosed
property and nonaccrual debt securities

0.83

0.49

0.37

0.83

1.33

Allowance for loan losses as a percentage of total nonperforming
loans

138

231

373

215

158

Loans past due 90 days or more and still accruing

$

54

$

14

$

16

$

15

$

32

Nonperforming
Assets

Nonperforming assets include loans and loans held-for-sale on
nonaccrual status, loans which have been renegotiated to less
than market rates due to a serious weakening of the
borrowers financial condition, real estate which has been
acquired through foreclosure and is awaiting disposition and
debt securities on nonaccrual status.

Consumer loans, except for certain large personal purpose
consumer and residential mortgage loans, are charged-off no
later than 180 days past due, and earlier, if deemed
uncollectible. Loans, other than consumer loans, and debt
securities are generally placed on nonaccrual status when
management determines that principal or interest may not be
fully collectible, but no later than 90 days past due on
principal or interest, unless the loan or debt security is fully
collateralized and in the process of collection. Loan amounts in
excess of probable future cash collections are charged-off to an
amount that management ultimately expects to collect. Interest
previously accrued but not collected on nonaccrual loans is
charged against current income at the time the loan is placed on
nonaccrual. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of
principal is probable. Loans that have been restructured to
yield a rate that was equal to or greater

48

than the rate charged for new loans with comparable risk and
have met the requirements for a return to accrual status are not
included in nonperforming assets. However, such loans may be
required to be evaluated for impairment. Refer to Note 4 of
the consolidated financial statements on page 83 for a
further discussion of impaired loans.

Nonperforming assets increased $191 million, or
82 percent, to $423 million at December 31, 2007,
from $232 million at December 31, 2006. Table 10 above
shows changes in individual categories. The $177 million
increase in nonaccrual loans at December 31, 2007 from
year-end 2006 levels resulted primarily from a $147 million
increase in nonaccrual real estate construction loans and a
$69 million increase in nonaccrual commercial mortgage
loans, partially offset by a $22 million decrease in
nonaccrual commercial loans, an $8 million decrease in
nonaccrual international loans and an $8 million decrease
in nonaccrual lease financing loans. An analysis of nonaccrual
loans at December 31, 2007, based primarily on the Standard
Industrial Classification (SIC) code, is presented on
page 51 of this financial review. Loans past due
90 days or more and still on accrual status increased
$40 million, to $54 million at December 31, 2007,
from $14 million at December 31, 2006. Nonperforming
assets as a percentage of total loans, foreclosed property and
nonaccrual debt securities was 0.83 percent and
0.49 percent at December 31, 2007 and 2006,
respectively.

The following table presents a summary of changes in nonaccrual
loans.

2007

2006

(in millions)

Balance at January 1

$

214

$

138

Loans transferred to nonaccrual(1)

455

176

Nonaccrual business loan gross charge-offs(2)

(183

)

(72

)

Loans transferred to accrual status(1)

(13

)



Nonaccrual business loans sold(3)

(15

)

(9

)

Payments/Other(4)

(67

)

(19

)

Balance at December 31

$

391

$

214

(1) Based on an analysis of nonaccrual loans with book
balances greater than $2 million.

(2) Analysis of gross loan charge-offs:

Nonaccrual business loans

$

183

$

72

Performing watch list loans (as defined below)



3

Consumer and residential mortgage loans

13

23

Total gross loan charge-offs

$

196

$

98

(3) Analysis of loans sold:

Nonaccrual business loans

$

15

$

9

Performing watch list loans (as defined below)

13

77

Total loans sold

$

28

$

86

(4)

Includes net changes related to nonaccrual loans with balances
less than $2 million, other than business loan gross
charge-offs and nonaccrual loans sold, and payments on
nonaccrual loans with book balances greater than $2 million.

49

The following table presents the number of nonaccrual loan
relationships greater than $2 million and balance by size
of relationship at December 31, 2007.

Number of

Nonaccrual Relationship Size

Relationships

Balance

(dollar amounts in millions)

$2 million  $5 million

20

$

66

$5 million  $10 million

11

71

$10 million  $25 million

7

116

Greater than $25 million

2

54

Total loan relationships greater than $2 million at
December 31, 2007

40

$

307

There were 58 loan relationships with balances greater than
$2 million, totaling $455 million that were
transferred to nonaccrual status in 2007, an increase of
$279 million, when compared to $176 million in 2006.
Of the transfers to nonaccrual with balances greater than
$2 million in 2007, $286 million were from the Midwest
market and $132 million were from the Western market. There
were 11 loan relationships greater than $10 million
transferred to nonaccrual in 2007. The 11 loan relationships
totaled $236 million and were to companies in the real
estate ($188 million) and retail trade ($48 million)
industries.

The Corporation sold $15 million of nonaccrual business
loans in 2007. These loans were to customers in the real estate,
automotive production and airline transportation industries. In
addition, the Corporation sold $82 million of unused
commitments in 2007, including $60 million with customers
in the automotive industry. The losses associated with the sale
of the unused commitments were charged to the provision
for credit losses on lending-related commitments on the
consolidated statements of income.

Nonaccrual loan payments/other, as shown in the table above,
increased $48 million in 2007, when compared to 2006. The
increase was mostly due to an increase in payments received on
nonaccrual loans greater than $2 million in 2007, compared
to 2006.

The following table presents a summary of total internally
classified watch list loans (generally consistent with
regulatory defined special mention, substandard and doubtful
loans) at December 31, 2007. Of the $3.5 billion of
watch list loans, $1.1 billion, or 31 percent were in
the Commercial Real Estate business line. Consistent with the
increase in nonaccrual loans from December 31, 2006 to
December 31, 2007, total watch list loans increased both in
dollars and as a percentage of the total loan portfolio.

December 31

2007

2006

(dollar amounts in millions)

Total watch list loans

$

3,464

$

2,411

As a percentage of total loans

6.8

%

5.1

%

50

The following table presents a summary of nonaccrual loans at
December 31, 2007 and loan relationships transferred to
nonaccrual and net loan charge-offs during the year ended
December 31, 2007, based primarily on the Standard
Industrial Classification (SIC) industry categories.

December 31,

Year Ended December 31, 2007

2007

Loans

Net Loan

Nonaccrual

Transferred to

Charge-Offs

Industry Category

Loans

Nonaccrual(1)

(Recoveries)

(dollar amounts in millions)

Real estate

$

232

59

%

$

280

62

%

$

63

42

%

Retail trade

47

12

61

14

38

26

Services

41

10

48

10

22

15

Automotive

16

4





(2

)

(1

)

Manufacturing

13

3

13

3

2

1

Wholesale trade

10

3

14

3

4

3

Contractors

8

2

13

3

4

2

Transportation

6

2

6

1

5

3

Churches

6

2

9

2

3

2

Finance

2

1

6

1

9

6

Entertainment

1







(6

)

(4

)

Other(2)

9

2

5

1

7

5

Total

$

391

100

%

$

455

100

%

$

149

100

%

(1)

Based on an analysis of nonaccrual loan relationships with book
balances greater than $2 million.

(2)

Consumer nonaccrual loans and net charge-offs are included in
the Other category.

SNC nonaccrual loans comprised six percent and less than one
percent of total nonaccrual loans at December 31, 2007 and
2006, respectively. As a percentage of total loans, SNC loans
represented approximately 21 percent and 19 percent at
December 31, 2007 and 2006, respectively. SNC loan net
charge-offs were $2 million in both 2007 and 2006. For
further discussion of the Corporations SNC relationships,
refer to the Earning Assets section of this
financial review on page 38.

The following table indicates the percentage of nonaccrual loan
value to contractual value, which exhibits the degree to which
loans reported as nonaccrual have been partially charged-off.

December 31

2007

2006

(dollar amounts in millions)

Carrying value of nonaccrual loans

$

391

$

214

Contractual value of nonaccrual loans

549

300

Carrying value as a percentage of contractual value

71

%

71

%

Concentration
of Credit

Loans to borrowers in the automotive industry represented the
largest significant industry concentration at December 31,
2007 and 2006. Loans to automotive dealers and to borrowers
involved with automotive production are reported as automotive,
since management believes these loans have similar economic
characteristics that might cause them to react similarly to
changes in economic conditions. This aggregation involves the
exercise of judgment. Included in automotive production are:
(a) original equipment manufacturers and Tier 1 and
Tier 2 suppliers that produce components used in vehicles
and whose primary revenue source is automotive-related
(primary defined as greater than 50%) and
(b) other manufacturers that produce components used in
vehicles and whose primary revenue source is automotive-related.
Loans less than $1 million and loans recorded in the Small
Business division were excluded from the definition. Foreign
ownership consists of North American affiliates of foreign
automakers and suppliers.

51

A summary of loans outstanding and total exposure from loans,
unused commitments and standby letters of credit and financial
guarantees to companies related to the automotive industry
follows:

December 31

2007

2006

Loans

Percent of

Total

Loans

Percent of

Total

Outstanding

Total Loans

Exposure

Outstanding

Total Loans

Exposure

(in millions)

Production:

Domestic

$

1,415

$

2,571

$

1,737

$

2,950

Foreign

391

1,133

469

1,267

Total production

1,806

3.6

%

3,704

2,206

4.7

%

4,217

Dealer:

Floor plan

2,817

4,228

3,125

4,312

Other

2,567

3,108

2,433

3,089

Total dealer

5,384

10.6

%

7,336

5,558

11.7

%

7,401

Total automotive

$

7,190

14.2

%

$

11,040

$

7,764

16.4

%

$

11,618

At December 31, 2007, dealer loans, as shown in the table
above, totaled $5.4 billion, of which approximately
$3.1 billion, or 59 percent, was to foreign
franchises, $1.7 billion, or 31 percent, was to
domestic franchises and $561 million, or 10 percent,
was to other. Other includes obligations where a primary
franchise was indeterminable, such as loans to large public
dealership consolidators, and rental car, leasing, heavy truck
and recreation vehicle companies.

Nonaccrual loans to automotive borrowers comprised approximately
four percent of total nonaccrual loans at December 31,
2007. The largest automotive loan on nonaccrual status at
December 31, 2007 was $5 million. Total automotive net
loan recoveries were $2 million in 2007. The following
table presents a summary of automotive net loan and
credit-related charge-offs for the years ended December 31,
2007 and 2006.

Years Ended December 31

2007

2006

(in millions)

Production:

Domestic

$

3

$

4

Foreign

(5

)



Total production

$

(2

)

$

4

Dealer





Total automotive net loan charge-offs (recoveries)

$

(2

)

$

4

Total automotive charge-offs from the sale of unused commitments*

$

3

$

12

*

Primarily related to domestic-owned production companies.

All other industry concentrations, as defined by management,
individually represented less than 10 percent of total
loans at year-end 2007.

Commercial
Real Estate Lending

The Corporation takes measures to limit risk inherent in its
commercial real estate lending activities. These measures
include limiting exposure to those borrowers directly involved
in the commercial real estate markets and adherence to policies
requiring conservative loan-to-value ratios for such loans.
Commercial real estate loans, consisting of real estate
construction and commercial mortgage loans, totaled
$14.9 billion at December 31, 2007, of which
$5.5 billion, or 37 percent, were to borrowers in the
Commercial Real Estate business line. Increased

52

nonaccrual loans, reserves and net charge-offs in the Commercial
Real Estate business line reflected challenges in the
residential real estate development industry in Michigan and
California.

The real estate construction loan portfolio contains loans
primarily made to long-time customers with satisfactory
completion experience. The portfolio totaled $4.8 billion
and included approximately 1,650 loans, of which 48 percent
had balances less than $1 million at December 31,
2007. The largest real estate construction loan had a balance of
approximately $43 million at December 31, 2007. The
commercial mortgage loan portfolio totaled $10.1 billion at
December 31, 2007 and included approximately 8,900 loans,
of which 74 percent had balances of less than
$1 million. This total included $8.7 billion of
primarily owner-occupied commercial mortgage loans. The largest
loan within the commercial mortgage loan portfolio had a balance
of approximately $56 million at December 31, 2007.

The geographic distribution of commercial real estate loan
borrowers is an important factor in diversifying credit risk.
The following table indicates, by location of property and by
project type, the diversification of the Corporations real
estate construction and commercial mortgage loans to borrowers
in the Commercial Real Estate business line.

December 31, 2007

Location of Property

Project Type:

Western

Michigan

Texas

Florida

Other

Total

% of Total

(dollar amounts in millions)

Real estate construction loans:

Commercial Real Estate business line:

Single Family

$

940

$

107

$

148

$

268

$

150

$

1,613

40

%

Land Development

348

116

155

47

53

719

18

Retail

168

108

186

43

50

555

14

Multi-family

88

24

164

63

74

413

10

Multi-use

127

35

38

41

50

291

7

Office

103

19

73



16

211

5

Land Carry

138









138

3

Commercial

83

16

19

5

9

132

3

Other







7

10

17



Total

$

1,995

$

425

$

783

$

474

$

412

$

4,089

100

%

Commercial mortgage loans:

Commercial Real Estate business line:

Land Carry

$

278

$

174

$

108

$

92

$

18

$

670

49

%

Office

42

57

24

11

3

137

10

Retail

9

52

5

3

46

115

8

Multi-family

7

91

20

32

35

185

13

Commercial

34

34

3



46

117

9

Multi-use

11

36

6

15

27

95

7

Single Family

12

3

5

11

13

44

3

Other

3

3





8

14

1

Total

$

396

$

450

$

171

$

164

$

196

$

1,377

100

%

Of the $4.1 billion of real estate construction loans in
the Commercial Real Estate business line, $161 million were
on nonaccrual status at December 31, 2007. Substantially
all of the nonaccrual loans were Single Family, Land Development
and Land Carry project types located in California
($84 million), Michigan ($57 million) and Florida
($18 million).

Commercial mortgage loans in the Commercial Real Estate business
line totaled $1.4 billion and included $66 million of
nonaccrual loans at December 31, 2007, primarily Land
Development projects located in Michigan ($55 million).

53

Net charge-offs in the Commercial Real Estate business line were
$52 million in 2007, and included $34 million in the
Midwest market, $16 million in the Western market and
$2 million in the Texas market.

The following table illustrates, by location of lending office,
the diversification of the Corporations real estate
construction and commercial mortgage loan portfolios.

December 31, 2007

Real Estate Construction

Commercial Mortgage

Amount

%

Amount

%

(dollar amounts in millions)

Michigan

$

2,141

44

%

$

5,160

52

%

California

1,541

32

2,660

26

Texas

777

16

924

9

Florida

188

4

325

3

Other

169

4

979

10

Total

$

4,816

100

%

$

10,048

100

%

Market
Risk

Market risk represents the risk of loss due to adverse movements
in market rates or prices, which include interest rates, foreign
exchange rates and equity prices; the failure to meet financial
obligations coming due because of an inability to liquidate
assets or obtain adequate funding and the inability to easily
unwind or offset specific exposures without significantly
lowering prices because of inadequate market depth or market
disruptions.

The Asset and Liability Policy Committee (ALPC) establishes and
monitors compliance with the policies and risk limits pertaining
to market risk management activities. The ALPC meets regularly
to discuss and review market risk management strategies and is
comprised of executive and senior management from various areas
of the Corporation, including finance, lending, deposit
gathering and risk management.

Interest
Rate Risk

Interest rate risk arises primarily through the
Corporations core business activities of extending loans
and accepting deposits. The Corporations balance sheet is
predominantly characterized by floating rate commercial loans
funded by a combination of core deposits and wholesale
borrowings. This creates a natural imbalance between the
floating rate loan portfolio and the more slowly repricing
deposit products. The result is that growth in our core
businesses will lead to a greater sensitivity to interest rate
movements, without mitigating actions. An example of such an
action is purchasing investment securities, primarily fixed
rate, which provide liquidity to the balance sheet and act to
mitigate the inherent interest sensitivity. The Corporation
actively manages its exposure to interest rate risk, with the
principal objective of optimizing net interest income while
operating within acceptable limits established for interest rate
risk and maintaining adequate levels of funding and liquidity.

Interest
Rate Sensitivity

Interest rate risk arises in the normal course of business due
to differences in the repricing and cash flow characteristics of
assets and liabilities. Since no single measurement system
satisfies all management objectives, a combination of techniques
is used to manage interest rate risk. These techniques examine
earnings at risk and economic value of equity utilizing multiple
simulation analyses.

The Corporation frequently evaluates net interest income under
various balance sheet and interest rate scenarios, using
simulation modeling analysis as its principal risk management
evaluation technique. The results of these analyses provide the
information needed to assess the balance sheet structure.
Changes in economic activity, different from those management
included in its simulation analyses, whether domestically or
internationally, could translate into a materially different
interest rate environment than currently expected. Management
evaluates base net interest income under an
unchanged interest rate environment and what is believed to be
the most likely balance sheet structure. This base
net interest income is then evaluated against non-parallel
interest rate scenarios that increase and decrease approximately
200 basis points (but no lower than zero percent)

54

from the unchanged interest rate environment. For this analysis,
the rise or decline in interest rates occurs in a linear fashion
over twelve months. In addition, adjustments to asset prepayment
levels, yield curves, and overall balance sheet mix and growth
assumptions are made to be consistent with each interest rate
environment. These assumptions are inherently uncertain and, as
a result, the model cannot precisely predict the impact of
higher or lower interest rates on net interest income. Actual
results may differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in
market conditions and management strategies, among other
factors. However, the model can indicate the likely direction of
change. Derivative instruments entered into for risk management
purposes are included in these analyses. The table below as of
December 31, 2007 and 2006 displays the estimated impact on
net interest income during the next 12 months as it relates
the unchanged interest rate scenario results to those from the
200 basis point non-parallel shock described above.

Sensitivity
of Net Interest Income to Changes in Interest
Rates

December 31

2007

2006

Amount

%

Amount

%

(in millions)

Change in Interest Rates:

+200 basis points

$

38

2

%

$

34

2

%

−200 basis points

(36

)

(2

)

(51

)

(2

)

Corporate policy limits adverse change to no more than four
percent of managements most likely net interest income
forecast and the Corporation operated within this policy
guideline. The change in interest rate sensitivity from
December 31, 2006 to December 31, 2007 was primarily a
result of loan and deposit growth, activities in the Financial
Services Division, competitive deposit pricing, maturity of
swaps and additions to the investment securities portfolio. In
addition, a variety of alternative scenarios are performed to
assist in the portrayal of the Corporations interest rate
risk position, including, but not limited to, flat balance sheet
and most likely rates, 200 basis point parallel rate shocks
and yield curve twists. Interest rate risk will be actively
managed principally through the use of on-balance sheet
financial instruments or interest rate swaps so that the desired
risk profile is achieved.

In addition to the simulation analysis, an economic value of
equity analysis is performed for a longer term view of the
interest rate risk position. The economic value of equity
analysis begins with an estimate of the mark-to-market valuation
of the Corporations balance sheet and then applies the
estimated impact of rate movements upon the market value of
assets, liabilities and off-balance sheet instruments. The
economic value of equity is then calculated as the difference
between the market value of assets and liabilities net of the
impact of off-balance sheet instruments. The market value change
in the economic value of equity is then compared to the
corporate policy guideline limiting such adverse change to
10 percent of the base economic value of equity as a result
of a parallel 200 basis point increase or decrease in
interest rates. The Corporation operated within this policy
parameter. As with net interest income shocks, a variety of
alternative scenarios are performed to measure the impact on
economic value of equity, including changes in the level, slope
and shape of the yield curve.

Sensitivity
of Economic Value of Equity to Changes in Interest
Rates

December 31

2007

2006

Amount

%

Amount

%

(in millions)

Change in Interest Rates:

+200 basis points

$

241

3

%

$

155

2

%

−200 basis points

(789

)

(9

)

(351

)

(4

)

The change in economic value of equity sensitivity from
December 31, 2006 to December 31, 2007 was primarily
due to the issuance of $515 million of 6.576% fixed rate
subordinate notes due 2037, which accounted for the majority of
the decline under the 200 basis point parallel decrease in
the interest rates scenario in the table above. Other
contributing factors were changes in loan and funding mix, and a
runoff in interest rate swaps partly offset by additions to the
investment securities portfolio.

55

The Corporation uses investment securities and derivative
instruments, predominantly interest rate swaps, as asset and
liability management tools with the overall objective of
managing the volatility of net interest income from changes in
interest rates. Swaps modify the interest rate characteristics
of certain assets and of liabilities (e.g., from a floating rate
to a fixed rate, from a fixed rate to a floating rate or from
one floating rate index to another). These tools assist
management in achieving the desired interest rate risk
management objectives.

Risk
Management Derivative Instruments

Risk
Management Notional Activity

Interest

Foreign

Rate

Exchange

Contracts

Contracts

Totals

(in millions)

Balance at January 1, 2006

$

11,455

$

411

$

11,866

Additions

100

5,521

5,621

Maturities/amortizations

(3,102

)

(5,377

)

(8,479

)

Terminations



(4

)

(4

)

Balance at December 31, 2006

$

8,453

$

551

$

9,004

Additions

400

4,035

4,435

Maturities/amortizations

(3,452

)

(4,037

)

(7,489

)

Foreign currency translation adjustment

1



1

Balance at December 31, 2007

$

5,402

$

549

$

5,951

The notional amount of risk management interest rate swaps
totaled $5.4 billion at December 31, 2007, and
$8.5 billion at December 31, 2006. The decrease in
notional amount of $3.1 billion from December 31, 2006
to December 31, 2007 reflects maturities and a current
preference for on-balance sheet risk management utilizing the
investment securities portfolio. The fair value of risk
management interest rate swaps was a net unrealized gain of
$143 million at December 31, 2007, compared to a net
unrealized loss of $19 million at December 31, 2006.

For the year ended December 31, 2007, risk management
interest rate swaps generated $55 million of net interest
expense, compared to $108 million of net expense for the
year ended December 31, 2006. The decrease in swap expense
for 2007, compared to 2006, was primarily due to the maturities
of interest rate swaps that carried a negative spread.

Table 11 on page 57 summarizes the expected maturity
distribution of the notional amount of risk management interest
rate swaps and provides the weighted average interest rates
associated with amounts to be received or paid as of
December 31, 2007. Swaps have been grouped by asset and
liability designation.

In addition to interest rate swaps, the Corporation employs
various other types of derivative instruments to mitigate
exposures to interest rate and foreign currency risks associated
with specific assets and liabilities (e.g., loans or deposits
denominated in foreign currencies). Such instruments may include
interest rate caps and floors, purchased put options, foreign
exchange forward contracts and foreign exchange swap agreements.
The aggregate notional amounts of these risk management
derivative instruments at December 31, 2007 and 2006 were
$549 million and $551 million, respectively.